A matter of life and debt


Hubert Edwards

In the third of a four-part series, Hubert Edwards warns that in the absence of greater growth The Bahamas will be borrowing for some time to come . . .

IN contrast to the current budget, the prior year is much richer in discussions around economic diversification and the development or growth of new/fledgling industries. The then-minister of finance highlighted a number of important focus areas for growth or expenditure management. These included transformation of state-owned enterprises (SOEs); enhancing the ease of doing business; renewable energy and solar power initiatives; addressing critical public infrastructure needs; reviewing and assessing the adequacy of current tax concessions. These, together with the then-stated intention of growing agriculture to a targeted ten percent of GDP within ten years, evidence the seeds spoken of by the prime minister this year. The main point is that if we are going to be revive economically, we must not lose sight of these identified deficiencies. We must become wedded to the idea that these are imperatives for seasoning future growth. The minister of finance, in outlining the vision going forward, said: “At the foundation is our commitment to expand support for Bahamian entrepreneurs and small businesses; increase [improve] the ease of doing business; build 21st century infrastructure as a new foundation for growth; invest in education to break the cycle of poverty; invest in renewable energy to create a sustainable future; and lead the digital transformation to a modern government.”

These initiatives clearly lay out in principle a road map for a more diversified economy. Emanating from this must be a discussion around forward and horizontal integration, as The Bahamas seeks to maximise gains from its mature industries - especially tourism - and retain more export earnings. The focus on agriculture last year was clearly, and still remains, one of the most viable paths to earning foreign currency revenues with the ability to leverage spillovers and linkages from the tourism sector. Growth is resident in our ability to create innovation, especially across the private sector. Within the context of innovation, we must consistently focus on the ability to scale-up companies and operations; access to larger markets; and expanding our capacity to facilitate exports. The Bahamas must find more significant means of deploying capital investments designed to fix the “critical infrastructure needs” of the country. With the realities as they currently are, there are two main means for this to materialise - direct investments and public private partnerships (PPPs). As it stands, the government will be constrained for a long time in its ability to fund such projects. If you take careful note, you will see that I just tied the two budgets together in a significant way towards solving the main challenges the country faces. I am not proposing that these are complete solutions. What I seek to show here is that the solutions The Bahamas needs lie outside the four corners of any single budget presentation.

Fiscal responsibility and debt strategy

One of the most pointed critiques of this year’s budget was the lack of a clear strategy for debt management. Marla Dukharan stated in her analysis that “while there is some cause for cautious optimism based on a few growth-oriented initiatives and the revival of the US economy, the fundamentals still point to a need to restructure re-existing unsustainable debt load and implement reforms to solidly place The Bahamas on a sustainable growth path”. This is crucial. Ms Dukharan last year posited her belief that The Bahamas would, in one year, be in the embrace of an International Monetary Fund (IMF) fiscal adjustment programme. We are delighted that her prediction did not hold true. I spoke to her recently, before an event we were both presenting at, and she was very forthright and open. She expressed that she, too, was pleased at the outcome, but admonished the exercise of caution, a position with which I am most agreeable. The Minnis administration is undoubtedly of the same belief, which was why it brought to Parliament and passed the new Public Debt Management Act, which came into force on July 1, 2021. The Act’s objectives [are to]:

• Ensure that the financing needs and payment obligations of the government are met in a timely manner, and at the lowest possible cost over the medium to long-term, consistent with a prudent degree of risk.

• Promoting the development and efficient functioning of the domestic government securities market.

• Ensuring that the public debt is managed consistent with the general principles of responsible fiscal management, the fiscal responsibility principles....

The question that looms large now is exactly what will be done, and at what cost will this be achieved. Will the administration employ a strategy of restructuring the debt or re-profiling? To fully understand what The Bahamas will be faced with, and gain an insight into the potential strategies or measures, we must deconstruct the targets against which the government proposes to operate. Consider the pronouncements of the minister of state for finance during the 2020 Fiscal Strategy Report. He said: “The upshot of the revenue and expenditure measures is to ensure that, at the end of the day, the government is able to meet its fiscal deficit target of 0.5 percent by 2024-2025, which is unchanged from the 2019 Fiscal Adjustment Plan.” The current budget projection holds GDP in 2023-2024 at $14bn, with a fiscal deficit of 1.1 percent and reduced interest payments, together with a reduced level of capital expenditure compared to the current year. This may suggest that we intend to either achieve debt capital reduction and save on interest costs, or restructure debt to reduce interest payments. If the arguments made earlier hold on the drain of productive capacity because of debt, then it is clear that The Bahamas is in for at least a decade-long hard slog to normalise its economic affairs.

This is confirmed by Kwasi Thompson’ saying: “The path to this objective has the overall balance moving from a high of 11.6 percent of GDP in 2020-2021 to 7.8 percent in 2021-2022, and then tapering off in the remaining years of the medium-term forecast. Even with this renewed momentum towards fiscal sustainability, the target debt-to-GDP ratio of 50 percent will not be achieved within the medium-term horizon. The ratio is expected to grow from 66 percent in 2019-2020 and peak at 85 percent in 2021-2022, before declining to 73.7 percent by 2024-2025. Based on this trajectory, the government now envisages attaining the 50 percent debt target by 2030-2031, which is an additional two years beyond the timeframe set in the 2019 Fiscal Strategy Report”. Analysis suggests that, at this stage, less than a year later these numbers may be too low. If every additional dollar of debt attained after a 58 percent debt-to GDP ratio has a negative effect, there are only two real prudent options available: Pushing aggressively for robust growth and significantly reducing borrowings. With a projected fiscal deficit of well under $200m for 2023-2024, and GDP at $14bn, this would certainly be achieved. What remains unclear, despite noted initiatives, is how exactly economic growth that helps to generate $3bn in annual government revenues will be produced. This demands some thinking, but I am unable to shake the idea of “where is the pain point” in this whole process and “what will be the price paid” to achieve the improvements. There is no question in my mind that something must give. We can, like Jamaica did in its two structural adjustment programmes, achieve gains through the reduction of debt at the cost of growth or do otherwise and go for growth with debt, and the objective of reducing the debt-to-GDP ratio. In the current global economic climate, outside of a structural plan with the influence of an international organization (the IMF), The Bahamas will not be able to fundamentally shift its debt burden through negotiation. Extending the maturities, yes, but otherwise the gains are limited. This possibility has to also be contextualised against any possible further ratings downgrades the country may experience. Such an occurrence will make debt more expensive and add greater uncertainty to the recovery process.

Either we give life to what needs to be done or be prepared to be further crushed by a burgeoning debt load. The discussion to be had cannot be focused myopically on debt and its reduction. The level of debt we experience is, and will continue to be, a function of the country’s performance and growth. If we therefore aggressively solve growth with a clear strategic focus, the debt situation will eventually resolve itself. It is in this process that our fiscal responsibility apparatus and principles will have the greatest potency. Through commitment to accountability, transparency, public sector financial reform and anti-corruption, The Bahamas will position itself for the optimal use of its resources. By becoming seriously committed to a clear strategic path, it is my view that The Bahamas will thrive. This commitment, though, is akin to the maintenance of an airport landing strip. Because it is a matter of life and death, anything and everything that takes away from or puts at risk the safe landing of the craft must be removed. The realities are a bit more complex than the analogy, but the outcome is important to the life of its people.

Time for focused action

The government recently released the first annual borrowing plan 2021-2022 (ABA), which outlines the approach it will take to meeting its financing needs for the current fiscal year. This, a requirement of the Public Debt Management Act 2021, is a step in the right direction. This approach will undoubtedly be one of the legacies of the current administration, and it brings a new level of transparency and clarity to the debt management effort. It shows the need for $1.85bn, driven largely by the deficit of $951m and debt redemption of $899.7m (both domestic and external). The plan says: “Given the scale of the budgetary financing required, and the observed absorption constraints in the domestic market, the Government will continue to leverage foreign currency borrowing opportunities, although not with the explicit strategic objective of supporting the countries’ external reserves”. The latter statement is an interesting one which, taking into account all the impacts of the current pandemic, is challenging to accept but may be indicative of the pressures involved. The government will borrow $959m (or 51 percent) in foreign currency. This continues the erosion of the difference between local and external debt. The document details maturing domestic bonds ($484.1m), analyses the issuances in foreign currency instruments and loans, and provides a clear understanding of the strategy and intention of the administration. This, in my opinion, should bring greater understanding and appreciation of where the country stands. One weakness, I believe, is a lack of analysis of the total debt burden. Such a broader assessment would provide greater context for analysis. It is, however, a positive start with stark underlying messages. Unless we grow or get austere, we will be borrowing for a while yet.

To be continued


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