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Imf: Bahamas Must Hit 'Average' $500m Surplus

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The government must run an unheard-of $500m fiscal surplus beginning in the 2024-2025 budget year to hit a key debt reduction target by the end of this decade, the International Monetary Fund (IMF) has revealed.

The fund, in a report accompanying its decision to approve a $250m loan to The Bahamas, revealed that the government will only achieve its goal of a 50 percent debt-to-GDP ratio by the 2030-2031 fiscal year if it achieves an annual budget surplus equivalent to four percent of economic output gross domestic product (GDP).

This would mean the government has to generate an average $472.65m primary surplus, the amount by which its revenue income must exceed all fixed cost spending bar interest payments, for a six-year period over the coming decade as the extent of the combined blow dealt by COVID-19 and Hurricane Dorian is fully revealed.

The IMF also warned that The Bahamas faces a three-year wait for its economy to return to pre-COVID-19 output levels, estimating that this would not occur until “end-2023” - more than three-and-a-half years away and a full 12 months further out than projections previously given by John Rolle, the Central Bank’s governor.

And, while backing the government’s policy response to the health and economic fall-out produced by the pandemic, the fund added that The Bahamas now faces “significantly higher” interest rates on its future borrowings as the Minnis administration moves to finance the projected $1.327bn fiscal deficit for the upcoming 2020-2021 budget year.

The report also noted that this nation faces “a pronounced balance of payments shock”, with foreign direct investment (FDI) inflows projected to fall by more than $290m or 50 percent year-over-year to $265m in 2020-2021. As a result, the IMF forecast that The Bahamas faces a $1.012bn balance of payments financing gap that will have to be filled with help from multilateral lending institutions.

Urging the government to immediately shift “to rebuilding buffers and strengthening resilience” once the COVID-19 crisis has passed, the IMF said: “Decisive and significant fiscal measures are needed to bring public debt on a clear downward path and achieve the fiscal targets under the Fiscal Responsibility Act.

“Staff calculations suggest that to achieve the Fiscal Responsibility Act debt target by 2030-2031, an average primary surplus of four percent would be needed starting in fiscal year 2024-2025, with significantly faster consolidation than in the current baseline already beginning in fiscal year 2022-2023.

“The exact speed of this adjustment should be calibrated to the economic outlook, subject to scrutiny by the Fiscal Council and parliament approval.” The closest that the government has come to achieving the required four percent of GDP surplus came in the 2018-2019 fiscal year, when it managed to notch a positive $342.5m balance on the primary account.

However, this is still $130m short of the six-year average estimated by the IMF, which suggests that achieving a 50 percent debt-to-GDP ratio within a decade will be virtually impossible - especially for a country that faces an annual risk of being struck by major hurricanes - without fundamental fiscal reforms.

“The authorities remain committed to fiscal consolidation over the medium term as specified under the Fiscal Responsibility Act,” the IMF said nevertheless. “The Government activated the escape clause of the Fiscal Responsibility Act after Hurricane Dorian hit the country. This allows the authorities to postpone the achievement of their fiscal consolidation targets (a fiscal deficit of 0.5 percent of GDP by fiscal year 2020-2021 and a public debt-to-GDP ratio of 50 percent by fiscal year 2024-2025) by four years.

“The COVID-19 crisis will delay reaching these targets further, but the authorities are steadfast to bring the fiscal deficit to 0.5 percent of GDP by 2026-2027 and the debt ratio to 50 percent of GDP by 2030-2031. They will resume various measures when the pandemic fades, including the reviews of state-owned enterprise (SOE) governance, investment incentives, and the pension system, enhancements to public financial management (PFM) to increase expenditure control and efficiency, and revenue administration reforms.”

The IMF report added that the Government’s fiscal stimulus measures to protect the health system, private sector, jobs and most vulnerable in society, were worth $437m - equivalent to 3.7 percent of Bahamian GDP - and spread over the current and upcoming fiscal years. The largest component is the $180m allocated to the tax credit and deferral initiative targeted at supporting payroll expenses for medium-sized and large firms.

Referring to the Government’s deficit financing plans, the IMF added: “The increased fiscal needs will be financed by a combination of domestic and external debt issuance, as well as financial support from the Fund and other IFIs (international financial institutions).

“Despite the recent S&P downgrade by one notch to ‘BB’, The Bahamas is expected to continue to have access to international bond markets albeit at significantly higher rates than before. The authorities plan a long-term external bond issuance in fiscal year 2020-2021.

“They are also seeking two guarantees from the World Bank’s Multilateral Investment Guarantee Agency (MIGA) for COVID-19 healthcare expenses and capital spending. The associated guaranteed commercial bank loans would have maturities exceeding five years. Discussions are ongoing with the Inter-American Development Bank (IDB) for new credit facilities amounting to $320m in fiscal year 2020-2021 for policy loans and investment loans, with maturities exceeding 20 years.”

Marlon Johnson, the Ministry of Finance’s acting financial secretary, confirmed to Tribune Business yesterday that the World Bank guarantees, which would ensure private sector lenders to The Bahamas are repaid, was among the $1.327bn deficit financing options being explored.

“We haven’t finalised the specifics of how we will make use of that facility,” he added. “Yes, we are looking at the MIGA facility as a way to secure private financing on favourable terms. It guarantees lenders will be repaid.

“It’s being explored to optimise the kind of rates we’re able to get out there in the marketplace. Again, we haven’t finalised the nature of the credit facilities. We are looking at the multilateral entities, the IDB and Caribbean Development Bank (CDB) facilities as well, to see how much we will make use of the facilities they have because we’re trying to get the best rates possible on borrowing and extended terms.”

The IMF report estimated that its $252m loan, together with $180m and $50m provided by the IDB and CDB, respectively, and $88m obtained from foreign lenders under the World Bank guarantees would cover some $570m - or nearly 60 percent - of The Bahamas’ balance of payments financing needs. The remainder, or $442m of the total $1.012bn need, would come from the drawdown on existing foreign currency reserves.

“The Bahamas faces a pronounced balance-of-payments shock,” the IMF said. “The current account balance is expected to deteriorate to a deficit of 17 percent in 2020, from a surplus of 0.7 percent in 2019. Although lower international oil prices and reduced imports will help the trade balance, these effects are more than offset by the sudden stop in tourist arrivals.

“On the financial account, foreign direct investment (FDI) inflows are expected to halve. Gross international reserves have been boosted by hurricane insurance payouts of about 8 percent of GDP in 2019 and 2020. The result is an external financing need of about US$1bn.

“It is expected that financial support from the Fund and other international financial institutions (IFIs), notably the Inter-American Development Bank (IDB) and the Caribbean Development Bank (CDB), will be able to bridge about 60 percent of this financing gap, helping contain the still-significant drawdown of international reserves. Reserves are expected to decline to about $1.3bn in 2020 and to remain at similar levels thereafter.”

The IMF estimated that The Bahamas’ services exports, representing the key tourism industry, will decline by $2.78bn or 24.5 percent of GDP this year. This represents a fall-off from $4.151bn to $1.371bn year-over-year, which will be partially compensated for by a $2.422bn or 21.3 percent contraction in total import volumes.

“A gradual recovery should take hold in 2021, assuming that the pandemic fades and global containment efforts can be gradually unwound. Tourist arrivals are expected to recover strongly in 2021 but reaching pre-crisis levels will take time,” the IMF said.

“With the removal of domestic containment measures, post-hurricane reconstruction activity is expected to regain momentum. These developments should lead to a rebound in real GDP growth of about 8 percent in 2021, but the recovery will be gradual with the economy reaching its pre-pandemic level only by end-2023. Inflation is expected to increase to 2.5 percent in 2021, along with the economic recovery, and converge towards 2 percent in the long run.”

Comments

happyfly 2 months ago

Here it comes, folks. Our foolish politicians took the bait of an easy bailout loan whilst flushing our economy down the drain by locking down - and now the fine print is coming to light. You cannot keep borrowing and borrowing and stealing and mismanaging and borrowing some more. Borrowing too much to pay off too many loans. The IMF is the equivalent of the bank manager calling you into the head office and explaining that if you don't get your finances in order they are going to foreclose on the mortgage. It is not fun. It is not good for hair-brained politicians that think they are smarter than they really are.... but in the long run it is good for the country. Balancing the books is growing up and displaying an independent maturity and responsibility that enables you to once again make your own rules and borrow again. In the meantime, we have some tough and unpleasant financial medicine to swallow

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Proguing 2 months ago

Mark my words. We are about to see a substantial increase in taxes. 20% VAT, doubling of NIB contributions, and 10% Corporate tax. And this is just the beginning. Unfortunately the Bahamas will have turned from a fiscal paradise to a fiscal hell in only one decade.

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rodentos 2 months ago

higher taxes was probably the purpose of covid19. A virus infecting 0.1% of population but all economy going to hell? You really can not believe this BS. Follow the money. Hedge funds and Soros want to suck up your money.

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tetelestai 2 months ago

Increased VAT was inevitable - nothing we can do about that. And, it is about time that we implement a corporate tax. It is specious to think that as a country we can exist without one.

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tribanon 2 months ago

Of course you and others like you, e.g. topdude, stillwaters, etc., support a much higher VAT. Why would we expect otherwise from such ardent supporters of Minnis who serve as his trolling voice on websites like this one? LOL

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Bonefishpete 2 months ago

I say just kick that can down the road but being the Bahamas are islands they roads aren't all that long.

Now if they had just started that VAT at 15% like they originally intended they'd have a surplus, well probably not.

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JokeyJack 2 months ago

Probably not. The VAT could have been 7.5% and then after 2 years raised to 15%. However, the real problem in this Bahamas is the LACK of information. All we get to see are Budgets. The public never gets to the the Actual spending figures for the prior year stood in columns next to that last year's "budgeted" figures.

It's just one nice sounding promise after another - year after year - with no follow-up. No report on what actually happened. A few reports here and there (of course) - like we were going to spend 20 million on police but ended up having to spend 25 million. Okay, fine. But that is nothing. When you're looking at a 6 to 8 billion dollar budget, and all of that money gets spent and people don't know where it goes - and have no way of finding out where it goes - then those who spend it don't have any worries.

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hrysippus 2 months ago

For almost 50 years now the Bahamas has lived in a fiscal fool's paradise. Endlessly borrowing as much as it can to fund an inefficient overpaid civil service and SOE's. Some part of the borrowed money has been spent on infrastructure development, mostly during the tears that the FNM were in control. The rope has now run out and we have to start paying back all that overspending. VAT to 20% like in the UK, 35% Death duties, and possibly income tax. Thank Ministers of Finance in past administrations; you were all totally inept or worse.

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tribanon 2 months ago

James Smith as past governor of the CB and past minister of state for finance was the worst of the lot of them.

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tetelestai 2 months ago

Does not matter, stop with the "this person was bad". Bumbling Bill Allen wasn't all that great either, so stop with the political nonsense. This issues is much, much more than James Smith - as I am sure you know.

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tribanon 2 months ago

See my earlier posting above. LOL

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Proguing 2 months ago

Actually we had a much smaller budget deficit before VAT. Basically if you give a politician $1 he will spend $2, if you give him $2 he will spend $4 or more!

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tribanon 2 months ago

Precisely! And the more incompetent the government is, the more borrowing that occurs.

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Baha10 2 months ago

No one likes Doom and Gloom, but reality is such now that the Financial Grim Reeper has spoken and it is now too late to turn back the hands of time and make amends for failing to properly manage this Country post Independence ... if only someone had listened and had the courage to make the tough decisions that successful Businessmen are required to make virtually every day, we could have held our heads high and marched on Bahamaland ... alas our Independence has come to an end in less than 50 years ... so, so sad .. and worse most Bahamians do not even appreciate what has happened, but regrettably they soon enough will.

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rodentos 2 months ago

By the way why does IMF have the money to borrow? Why do governments need to borrow money? Why does IMF never borrow from someone else? Illuminati crap.

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Porcupine 2 months ago

If you start asking these questions, you end up down the rabbit hole. Money is created as debt. All countries could print their own money, as does the US. Where did the US get 16 trillion dollars to hand to banks and corporations? It is all a Ponzi scheme. We are all enslaved. Some with money don't think they are. My wish is that it does all come crashing down, as it well should. The lack of education and total lack of concern will catch up with us. As usual, it will be our children who pay the price. The majority of Bahamians don't live in The Bahamas. Even fewer will be able to live here soon enough.

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Dawes 2 months ago

Seeing as we never have a Government willing to make the hard decisions by trimming their expenses, we know that after the election taxes will go up (regardless of who wins). Then the unions will demand more and the Government will say yes, leading us back to square one.

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tribanon 2 months ago

The smart money long ago fled the country. A good portion of government's latest proposed borrowing of US$1.3 billion will be used by our dumb corrupt politicians to exchange their own Bahamian dollars for US dollars at about a par exchange rate before government announces a major devaluation of the Bahamian dollar. These corrupt politicians will also help their family members and favoured cronies to do likewise, i.e. exchange their Bahamian dollars for US dollars at about a par exchange rate. All other Bahamians will be left with their seriously devalued Bahamian dollars and even more national debt to pay - US$1.3 billion more.

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