Given the need for growth, let us consider where we are. The most recent budget has a primary deficit of $60m and a projected debt servicing payment of $512m. With these numbers in mind, the economist Marla Dukharan highlighted the nature of The Bahamas’ present predicament. She stated in a report: “It is important to note that, up to a certain point, acquiring debt has a positive impact on GDP [growth]. According to the IMF, up to around 30 percent of GDP, debt has a positive impact on growth, but beyond 30 percent, the positive effect diminishes with each additional dollar of debt until around 56 percent of GDP. At this point, every additional dollar of debt has a negative impact on GDP.”
According to the Budget, The Bahamas’ debt-to-GDP ratio is projected to settle at 82 percent. However, if calculated on the basis of a significantly-contracted $9.5bn economy, with a projected debt of $10.5bn, it becomes clear what we are faced with. If the International Monetary Fund (IMF) position holds, the country has a significant amount of work to do to claw itself back to a place where deficit financing is growth generating. Bear in mind that The Bahamas has generally not demonstrated the ability to secure robust growth. It is therefore unlikely to demonstrate otherwise in the face of downward pressures exerted by the level of debt on the Government’s books. Historical anemic growth rates must be reversed, but the ability to do that just became more difficult. I therefore continue to suggest, as I have done repeatedly for more than ten years, that The Bahamas must get aggressive about growing the economy. Let us take some chances and make some bold moves; let us not settle for the current economic construct but work to expand and enhance whatever exists.
When the man in the arena speaks
In the speech Citizenship in a Republic, Theodore Roosevelt stated emphatically: “It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs,....who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly...” This speech, more popularly known as the Man in the Arena, is a very powerful statement and influential set of words that has stood the test of time and “troubled” the consciousness of many. While the message is clear and does not leave much room for debate, I believe that in the context of building a republic he erred in totally discounting the role of critics. In closing the debate on the Budget, which was intrinsically tied to that of the previous year, Dr Hubert Minnis said: “it is vital as a government to listen and to learn from various criticisms and differing views. Yet over the past four years, and over the past year-and-a-half especially, there are certain critics who talk plenty fool; who did not have to feed the people; who did not have to ensure benefits to keep families together and households going; who did not have to make the tough decisions about COVID; and who did not have to get the country ready for recovery. My government had to do more than talk. We bear the responsibility of governance. We had to act. And we did act. We have governed on behalf of the people. We saved lives and people’s livelihoods. We do not apologise. I do not apologise for borrowing to take care of our people’’. It may not be immediately evident, but this very powerful statement may yet be the clearest one made regarding the choices that we face as a country. The Prime Minister did not fall for the deficit of discounting the critic, but instead properly contextualised the potential foibles of the critic, the positive role the critic may play, and the value that can be gleaned therefrom. However, it is the “man in the arena” who best appreciates the trade-offs, the give and take, the bump and bruises leading to whatever the outcome may be. It is the man in the arena with the decision to make on who eats and who does not that best appreciates the tensions. It is the man in the arena who understands the pull of opposing and competing forces, and the need to strike a balance, and it is the man in the arena who best appreciates the extent to which that balance has been struck.
Therefore, when the “man in the arena” indicates a stark choice between an increasing national debt and the ability to “feed the people; ensure benefits to keep families together and keep households going; make the tough decisions about COVID; and get the country ready for recovery”, he should not be ignored. While this may not have been the main intent, I believe that in a moment of candid, open and vulnerable disclosure, the Prime Minister gave a glimpse into the limited space between incurring more debt and national survival, while also giving Bahamians an appreciation of the fierce undercurrents which tug at the economic options available to the Government. The Budget, on analysis, bears this out. Interest (debt servicing) payments at $512m, and capital expenditure at $378m, together are equivalent to 93.6 percent of the total projected deficit. When we consider that capital expenditure is one of the areas that has the greatest potential impact on future growth, and represents investment for the future, we start to develop an appreciation of how serious the debt issue is for The Bahamas. One should not walk away with the impression that capital spending by the Government alone is the only means of growth, but it is instructive to analyse the current fight by the Biden administration to maximise spending on capital infrastructure as a means of driving and maintaining that country’s economic competitiveness.
In analysing the Budget, how does one truly appreciate the pressures faced by those at the helm? As in a previous article, I raise the questions: What are the things you would be insisting on having and not having in the Budget this year? What trade-offs would you be open to making? Taking into account the following factors: Revenue, growth, expenditure, deficit, debt, reserves, the pegged exchange rate and taxes, which aspect would you wish to be either aggressive or conservative with, or put at risk? Considering you are faced with high unemployment, a disrupted economy, high debt and low revenues, what would your trade-offs be? Should there be an increase in taxes to secure a reasonable amount of revenue, but with the risk that such a move could potentially cause further harm to the economy? How would this affect potential recovery and impact an already-stretched private sector and population, at least at this time in the midst of a global crisis? Would you overlook the state of your medical infrastructure, which COVID-19 has exposed as significantly weak? Would you overlook the private sector, which stands as an option for absorbing some unemployment?
Would you be minded to not inject foreign currency into the economy to preserve the external reserves, and continue protecting the pegged exchange rate? What about social sector support? Would you not make allocations to support struggling households amid continuing high unemployment? I believe that, while we may argue for government spending to be allocated differently, there are some important areas that most reasonable persons would cover, as was done in the Budget. In the face of limited resources, the choices cannot be easy. If this argument of limited room to manoevere, limited resources and high-pressure demand holds true, it would seem that the major debate rests outside the numbers. Based on my early analysis I believe that the deficit should have been larger, possibly beyond the prior year’s $1.3bn. If historical performance holds true, and revenues comes in at 75-80 percent of projections, all other things being equal the deficit could end at approximately $1.4bn. Before we get carried away, the latter statement is not very accurate. If all things are held truly equal, based on historical behaviour, the capital budget will be curtailed to restrict the extent of the deficit. In order to maintain our deficit from within a certain subjective band, it has been the practice for successive administrations to restrict capital spending and investment. The Bahamas has for a while been in the throes of a debt cycle with all the elements necessary to be dangerously vicious, and that has emerged over the last two fiscal periods.
Outside the lines of the Budget
There is no salvation in the budgeting process until there is an acknowledgement and appreciation that $2bn in revenue and $3bn in expenditure over multiple years is not a sustainable approach. It is, however, one that will arrest us in a state where, for example, the need to maintain a resilient social sector, as part of the effort for maintaining a resilient economy, is an unequivocal decision to borrow. Recent developments in the tourism sector are much-needed. There is every indication that a high level of economic activity is churning across that sector. However, let us consider that even if The Bahamas were to experience its historical best revenue year at $2.4bn, we would still be running a deficit of over $700m. What does this tell us? Fixing the state that we are in can come by only one means, and that is economic growth. Even if we were to get back to our a pre-COVID-19 economy of approximately $13bn, The Bahamas needs revenue of well over $3bn annually to even start making a dent in the debt stock. As long as debt remains elevated, there will be challenges. This is one of the reasons I have consistently highlighted the initiative to develop Invest Bahamas as being so important to the future. Where the country is currently, it cannot change its fate on the steam of local investors nor the present pace of foreign direct investment (FDI). Unless we secure significant success in attracting heightened levels of investment (foreign or domestic), create a highly facilitative supporting infrastructure for economic growth, ramp up national productivity and develop a more diversified economy, all leading to sustained and higher growth than historical norms, The Bahamas will struggle to escape the clutches of its current debt burden.
While The Bahamas is preparing for the “bounce back”, it must also now focus on its ability to “bounce higher” than pre-COVID-19. I believe I have made the case that simply going back to normal is always going to be sub-optimal. While pandemic-imposed issues have been highly distracting, we must always be mindful of the challenges that existed prior, such as ease of doing business woes, energy challenges, and threats to the value proposition of the financial services industry. To enhance our “bounce higher” ability, the country must seriously focus on its ability to diversify the economy. This is where listening to the “man in the arena” is most critical. The Prime Minister clearly indicated that the 2020-2021 and 2021-2022 Budgets are Siamese twins. To fully flesh out any analysis, it demands going back to the previous year.
To be continued......