In the second of a three-part series, Hubert Edwards warns that today's Budget represents a pivotal moment for The Bahamas' development . . .
Outside of the numbers, there are a few initiatives that will positively affect The Bahamas’ economic position. A number of initiatives have been implemented to improve transparency and efficiency in public financial management. The Public Financial Management Act 2021, Public Debt Management Act 2021, Public Procurement Act 2021, and Statistics Act 2021, together with progress in implementing the Freedom of Information Act and adopting accrual-based accounting for the public finances, all bode well for greater transparency going forward. Given the economic situation; the concentration of debt; and uncertainty around true liabilities, including contingencies and guarantees, these developments are set to provide better-quality information and radically shift our view of the true state of public finances. While the latter is not likely to be “positive”, it is necessary if an honest, transparent and well-informed suite of debt management and strategies and fiscal reforms are to come to bear on the current state of affairs. Citizens will be better able to judge government strategies, and there should be greater discipline in the government’s financial machinery. It is clear that the administration is making small but important steps in its digitisation of public services. Progress in the area of digital currency has potential for creating a more efficient payments infrastructure for commerce.
Fixing the challenges
While there will be an understandable impulse to ignore critical reforms in light of the government’s challenged finances, these matters should not be downplayed. The reason they are so important is the value they hold for the country going forward. Growth and development will be highly influenced by the institutional changes we make, and the national competencies developed. The desire to shift to accrual-based accounting, for example, has an often unspoken implication that its implementation will see issues such as corruption and waste in the public finances being comprehensively dealt with. However, the immediate improvements desired may not actually materialise in the near term. There are no panaceas. What it will take to change the fortunes of The Bahamas, and the country’s trajectory, is a fundamental shift in approach and how national conversations are done. Recently, during a discussion in a local forum, in addressing debt, expenditure and a balanced budget, I made the following statements: “I believe there is a need for some clear public discourse on where we are as country and where the economy sits. The fixing for the future is difficult and demands urgent acknowledgement.”
Much-needed reforms have been meandering for some time. They collectively have the capacity, if properly implemented, to paint a truer picture of the state of the country’s finances. The presentation of the government’s financial position is accompanied with footnotes because of the cash-based accounting currently employed. My other point at the forum was: “There are some significant tensions at play, and we must assess these through the lens of the construct and fundamentals of the economy itself, how it is designed to work and the fundamental underpinnings thereof. The Bahamas is currently either in, or flirting with, a vicious cycle of debt and borrowing. Some aggressive estimates, taking into account contingencies, would place debt-to-GDP (on the basis of an $11.5bn economy as projected by the IMF) at near 100 percent.”
With the government’s direct debt at $9.5bn, and having regard for contingencies such as public services pensions and guarantees to certain state-owned enterprises, it is not unreasonable to assume there is another $2bn-$3bn on top of that. Even if you do not accept this argument, it is likely that the upcoming budget cycle will demand debt at least consistent with the current fiscal year. That alternative position still takes us to 100 percent debt-to-GDP.
“The economy is built and driven, or controlled, by a pegged exchange rate which demands a level of reserves. Without robust flows of foreign exchange, this is going to be under pressure, as evidenced currently.” One may disagree with such a statement. However, in my opinion, where debt is needed to shore up a position that creates pressure. It is logical, given the current state of commerce and trade, or rather the lack thereof, that this pressure exists. Without a robust tourism sector, this will always be challenging. The debt levels, therefore, could spiral into areas seen in some southern Caribbean countries if tourism remains depressed.
To make the point, allow me to present exhibit A and B, Jamaica and Barbados. Both countries eventually found themselves wrapped in the embrace of an IMF programme. Both are present lessons that we should take note of. I am aware of a quick refrain by some persons who ask: “What can they teach us?” While I will not challenge that statement here, it is sufficient to say look at the things that have gone wrong, and which led to the weakness of those economies. Earlier I highlighted, with great delight, the fact that The Bahamas’ chances of being in such a programme at this time are low. It should be remembered that both Jamaica and Barbados are more diversified than The Bahamas. Both economies have more compelling reasons for matters of devaluation given the presence of robust export sectors. These factors are not in favour of The Bahamas and, as a result, the outcomes could likely be very, very painful.
How, therefore, do we fix the current challenges? How urgent is the fix? Do we, as a country, have the capacity to address the challenges? On the first question, I do not know. In The Bahamas, we are effectively always solving for the exchange rate peg via the reserves. Looked at in this way, it is easy to understand that if there are constant foreign exchange inflows then the country is well-positioned, or at least doing OK. If there are no foreign exchange inflows, then the only alternative is to borrow or not spend. The latter has its own set of implications for the production of public goods and services, at a minimum. As noted above where I cited Jamaica and Barbados, simple austerity will not work as in other economies where the exchange rate is allowed to find its own level in response to new taxes, reduced spending, curtailed production. There is absolutely no value in The Bahamas experiencing a devaluation, or at least no good reason. Even if the Bahamas employed austerity measures, there is always a need for foreign exchange inflows at a certain level. That portion of the equation will keep sending us back to the credit markets to borrow, which is clearly an unsustainable reality.
“On the second question, everyone who is paying attention understands it is urgent. What we are currently seeing is a buildup of “critical mass”, which from a debt perspective is a massive negative. More importantly, the current situation demands foreign exchange borrowing, which is tipping the scales on the traditional debt structure of the country. We recently heard a local chief executive challenge the Government to be careful with its debt ratings as local investors run the risk of taking paper losses that may be a dissuading factor in deciding whether to take on more government bonds. Historically, Bahamian dollar borrowings outstrip US dollar borrowings. This remains the case currently, but the space has narrowed - and will continue to narrow - until the economy starts to produce sufficient foreign exchange inflows. This introduces a very delicate reality. The proportion of income that will now go into debt servicing, over the next few years at least, shifts the productive capacity of the country. This, though, is not fatal as debt management/restructuring strategies can make a difference, and with improved economic activity create a better reality.
The third question is: Do we have the capacity to fix it? In my humble opinion, we do. However, this will come with pain. It will require collaborative actions, and demand accepting some truths about the current structure of the economy. It demands urgent and consistent focus on the structural weaknesses, which are all well known, and, importantly, it demands very serious strategic action to help prepare the national infrastructure for the future. There are no quick solutions. This is really where public discourse is needed the most. The way forward is neither easy nor clear. We must accept that and state it as such. If we were to do otherwise, we may unwittingly understate or underestimate the effort required to move The Bahamas forward. As a country we are confronted today with a set of circumstances that tears at the root of our economic arrangements, exacerbated by many years of neglect in addressing issues that help the economy run more efficiently and effectively. A significant part of the capacity to fix the challenges currently faced, therefore, lies in the commitment to acknowledge the level of difficulty and make the required fundamental changes.
The idea of a balanced budget in the near term for The Bahamas is, in my opinion, not on the cards. It is important to appreciate that as good as it sounds, striving for a balanced budget may itself be a bad strategy at this point in time. The current pandemic has taken away approximately $2bn in GDP, society is under pressure with high unemployment, and there is great uncertainty from a foreign direct investment (FDI) perspective. I believe that policymakers will be forced to make some tough calls in the near term, with the potential for increased taxes and the impact this will have on The Bahamas’ psyche. Borrowing is firmly on the cards. Our benchmark should become how do we secure a real return on investments derived through borrowing, and how those investments are strategically deployed to facilitate future growth, unlocking greater productive capacity. We are at an interesting crossroads. The question is whether this is a tipping point, and how it can be managed. Today’s 2021-2022 Budget will be an unusually important moment for The Bahamas.
To be continued............