* In the final of a four-part series, Hubert Edwards warns that The Bahamas has reached a 'debt trap' tipping point that will require a collective effort to address . . .
One of the greatest complaints following the budget communication is that there was no strategy for addressing the national debt. This is not accurate. There was a strategy outlined. Essentially this called for sinking fund arrangements to pay off $775m; containing interest costs through borrowing at lower interest rates from multilateral financial institutions; leveraging fixed interest rate debt in a low interest rate environment; and creating an appropriate mix between domestic and foreign currency debt. This will be bolstered by the extra transparency produced by the Public Debt Management Act 2021, which comes into force on July 1 and demands that a debt management strategy be published for all to see.
The question here is whether the strategy is adequate, and the extent to which it will hold in reality. The sinking fund will take some time to build up and is subject to the varying government revenue inflows. This problem is highlighted by the absence of sinking fund contributions during the current fiscal year due to the fall-out from the COVID-19 pandemic. The other aspect to consider is the extent to which loans from multilateral financial institutions will be sufficient. They can be accessed at rates superior to those on the open market, but the amount of debt needed to fund the deficit will still see a significant portion of it being higher cost borrowing. The more than $100m increase in the government’s debt servicing costs, to some $512M in the 2021-2022 budget, is indicative of the rising debt burden. Interest costs now represent 23 percent of revenue and 18 percent of total expenditure, up from 18 percent and 15.5 percent, respectively. This is significant and, with uncertainty around economic performance, could become more so.
The debt stock is one of the most critical issues to be faced during this and subsequent budget cycles. In the context of Gladwell’s “tipping point” definition, debt in The Bahamas has reached a “critical mass” such that it must be addressed quickly, seriously and receive concentrated attention. The total debt burden is expected to grow past $10bn. Of every dollar earned, based on the projections, twenty-three cents will go towards paying interest on this debt. The debt-to-GDP is just shy of 100 percent. All this is against the glaring reality that the government’s accounts are done on a cash basis.This is expected to change soon with public finance reforms, but these accounts presently fail to show future spending commitments and contingencies, and the potential impact that state-owned enterprise (SOE) debt will have. This situation has the ability to significantly erode the productive capacity of the county’s finances.
To put the situation in context, consider the fact that the annual fiscal deficit for the past seven years has typically been higher than interest/debt servicing costs. What this means is that The Bahamas is actually borrowing to pay its interest obligations. This will continue to tighten like a noose around the country’s economic neck. Escaping this trap by marking some hard decisions, and taking definitive actions, is critical. There is no need to reinvent the wheel. Case studies abound in the region, and The Bahamas should look to those who have suffered this path before for insight.
Barbados and Jamaica provide potent lessons as to what is at risk, and the potential upside of definitive actions and strategies. Jamaica struggled with the burden of debt-to-GDP at over 140 percent. Over two IMF programmes, this was reduced below 100 percent for the first time in many years. This success, though, came at a significant cost. Consider the fact that the results were secured without any notable economic growth, effectively winning on the backs of deep sacrifice by citizens. However, also consider the reforms that were secured, which arguably protected Jamaica from deeper disaster during COVID-19. This shows both the risk and the potential for The Bahamas. Continuing on its current trajectory, the country is heading into a debt trap where there is a vicious cycle of borrowing and paying more, and where the power of government spending is significantly blunted by interest payment obligations. This has the potential to adversely impact individual Bahamians, as there will be a need to increase taxes, introduce new taxes, and implement austerity measures or otherwise risk entering some form of IMF adjustment programme.
If there is low economic growth, and revenue is not improving, the Government must increase taxes. If revenue growth cannot be secured, spending must be curtailed. The pegged exchange rate is upheld by the foreign currency reserves. If inflows are not robust, foreign exchange loans must be secured to keep Bahamian dollar parity with the US dollar. Yes, we are clearly at a tipping point, and debt is one of the factors that will exert the most pressure going forward. However, debt is largely a function of all the other factors. When we look at the other factors in this “formula”, it becomes clear that if as a country we fail to secure broad-based solutions the impact could be long lasting with the potential to create radical shifts in living standards.
Call to action
These are starting points for a strategic outlook on the way forward.
The most important issue to be addressed is the a path to economic growth, and an always-evolving destination for that growth. In the process of considering this there must necessarily be some dreaming, aspirational reaching beyond the points that all realities suggest is impossible now. We must then shift to start asking ourselves how we can get there, how can we achieve this desire and be committed to confronting the obstacles that lie between where we are now and where we are desirous of being.
The Budget has provided a real glimpse into the challenges of the future. No matter who leads the country after May 2022, the tasks will be difficult. Conventional wisdom suggests that as much as we think we now know, it could be more significant. This demands a non-partisan coalescing around a national plan. Partisan approaches have left the country’s performance sub-optimal. There is a lesson to be gleaned from Jamaica in the continuous application of its national development plan across multiple administrations.
Confront the issue of taxation and the potential implications it holds for The Bahamas, both in its onshore and offshore sectors. It is important to note the Budget declaration to undertake a careful study of the tax regime. I believe there is an urgency, or at least a set of realities, that may shorten the timeline for doing this. There is no denying that this is a difficult matter. It strikes at the core of the current value proposition. However, it is important not to miss the global shift.
The current debt situation demands a broader discussion beyond reduction. Remedial action must be tied to growth, which is tied to the fortunes of financial services and domestic investors. There should be a clear and broader discussion around debt management, taking into account the interest of all relevant stakeholders. This discussion should serve both as a platform for creating deeper appreciation of where The Bahamas is and serve to rally the country’s collective interests. Everyone has a role to play and that must become blatantly clear.
● Finally, a commitment to take a careful look at the enabling in investment environment. The InvestBahamas initiative is a step in this direction. However, many other aspects hold the potential for unlocking national value.
What jobs did the Budget have to solve, and did it solve them? Were there clear solutions or priming for future growth? How enabling is this Budget or the initiatives announced? Regardless of your answers, I believe this Budget has some good things for both the moment and longer-term impact. There is no question that the Budget sought to respond to some urgent matters, such as healthcare infrastructure and unemployment. The current context within which the Budget is set raises a number of questions as to whether it has at least started to answer the questions, which must be addressed for the future prosperity of The Bahamas while solving current problems.
We are at a tipping point. The task is to look at the realities and ask how we can safely walk back from the threshold of those things that limit growth. How can we effectively manage those matters that may have, or are approaching, a boiling point and hold important influence for social and economic resiliency? The challenges loom in a large way like an ominous dark cloud, with the potential to cover any sliver of sunlight that emerges. The difficulties suggest that we are at an important moment where the collective holds great influence on future fortunes. Now is the time for co-mingling minds, thoughts and ideas. Now is the time for accepting things as they are, and working to change the fortunes where they are inconsistent with our desires. Now is the time for The Bahamas to start actively thinking about how it can tip all scales in its favour, and embark on the adventure of securing consistent, sustained and above-average growth. Anything less will bring with it enhanced pain. The choice is yours. I ask but for one thing: Let us not argue just to win but to build consensus, in the interest of the country, so that together we all can grow and thrive. Ubuntu!