In a second article, Hubert Edwards writes that The Bahamas must enact 'the greatest set of reforms the country has ever seen' to set it on the right economic and fiscal track . . .
In early January, before the first explosions in Ukraine, we were already looking at an economic reset of the country with constrained optimism. On January 28, the Government released its Fiscal Strategy Report and Medium-Term Debt Management report accompanied by this most sobering statement: “The nation’s fiscal health is in a perilous state.” By early February we had cause to embrace greater optimism as the evidence of a waning pandemic became clearer. However, just over three weeks ago, the first shot was fired in eastern Europe and peril took on a longer-term persona. This could lengthen our national recovery and further unsettle our economic challenges.
The economics around the sanctions levied against Russia will adversely affect inflation but, maybe even more seriously, the pressure on energy costs could become frightening. Imagine oil at $150 or more per barrel, following a significant increase over the last two years of COVID-19. The US reluctance to ban Russian imports of oil seems to be fracturing. This will likely send us into the inflationary stratosphere. US monetary policies will likely respond with an upward shift in interest rates. The implications for The Bahamas and the wider Caribbean are very serious.
Some of the more potent issues surrounding this war are the extent to which Ukraine and Russia impact the global food supply, especially as it relates to their collective grain exports, which account for 30 percent of world trade in these commodities. Then there is Russia’s dominance in oil and gas exports, and Europe’s reliance thereon. Coupled with the ubiquity of these products in world commerce, these push the risk of hyperinflation to a high level. The knock-on effect of such a reality for countries with fossil-dependent energy systems cannot be understated. At the time of writing, a barrel of oil was trending at above $125, having already flirted with levels above $130. For The Bahamas and the region, the nascent economic recovery could take a hit. The war may be many miles away, but the impact is almost immediate and extremely disruptive, adding to an already highly uncertain environment.
The impetus needed for growth could be imperiled by global inflation. This will result in additional costs as countries, for us mainly the US, continue their efforts to tame inflation by feeding it increased interest rates. This will have a direct impact on The Bahamas’ foreign currency debt. There is, though, the sliver of a possible upside where capital could shift from near the Ukraine war zone looking for “safer” homes. Shifts in strategic focus, and our usual sphere of prospecting, could make this a real possibility. In risk management terms, this is seeking to exploit possible upsides from the war. A significant part of our response to the ongoing crisis begs the questions: How must we start to think about the next six to 12 months? What are our views and outlook for the next two to five years? What paradigm shifts and transformations will we pursue over the next five to 20 years?
Why is this train of thinking important? We have clear evidence that the resilience and robustness of the economy is below what we desire. We must accept that, and respond expeditiously to short-term priorities while preparing ourselves for the mid-term toiling and making those shifts that will better position us to contend with similar shocks in the future; the long-term future. It is my considered view that the current conversations are too “normal” in response to very abnormal, rapidly-shifting circumstances, filled with uncharacteristic levels of uncertainty.
Why is this so? The Bahamas has proven itself very resilient in spirit. The country has faced many crises and bounced back credibly. This includes the 1970s OPEC oil crisis; Middle East wars; the September 11 terror attacks; and the 2008 global financial crisis. However, it is useful to reflect on the fact that The Bahamas has never faced a crisis in as weak a position as it is currently. We are recovering from a significant revenue downturn. The debt stock of the country has reached levels where it is arguably imprudent to borrow heavily in the international market, despite facing an extended period of unfunded deficit and borrowing needs. Additionally, the Dorian-related destruction in Abaco and Grand Bahama has resulted in substantial portions of their economies becoming unproductive and delayed rebuilding.
The emergence of the Russian-Ukrainian war is an unwelcome bother for The Bahamas and the region. It is likely to increase the time during which “green shoots” of economic recovery bed-in, and cause lags in the economic turnaround. The conversations must necessarily become broader and more strategic, informed by realities and more focused on solutions. The conversations must move beyond analysis of ‘what is’ to contemplating where do we go from here and how. On balance the “where” is much easier to answer and agree on. The “how”, fairly assessed, is likely to come with measures of pain and uncomfortable choices. Success, though, lies firmly on the other side of these choices. Consider how the recent news has been rich with examples of challenges. Depending on how closely you follow these issues and your willingness to analyse, you might very well be able to tease out unspoken information and themes. Often, the analysis of these stories, reducing perceived abstractness, can produce greater value than the headlines, quotes and the immediate focus of the stories may convey.
The path between now and what we desire - Debt-to-GDP of 50 percent; revenue-to-GDP of 25 percent; a balanced budget; growth and resiliency – will require focused, strategic efforts and significant reforms. The path is perilous, largely because of what has transpired up to now. The circumstances are abnormal and not the best to do what is necessary. There is no other path to walk. How do we do this? How do we heighten focus on the adjustments needed? How do we plant now for tomorrow, informed by the many instances of missed sowing that would have made us stronger today? What strategic shifts are needed to better prepare us for the future? Where are the pitfalls with which we must contend? But, more importantly, what are the opportunities to be pursued? Without being too philosophical, “the obstacle is the path”. There is no easy way to skirt that fact, and doing so would be ill-advised. Why? COVID-19 cruelly gifted us the most comprehensive risk assessment for a greater understanding of weaknesses in the economy. We are therefore well empowered in knowing what needs to be fixed and why.
In important ways, the wars for the future are raging right now. How we fit into these battles, and what spoils we intend to take from them, is maybe the most important thesis to be explored. Objective analysis would suggest near-term pain. However, taking a strategic and risk management approach, the current realities would suggest we start from points of weakness and build for the future. Address the structural weaknesses long left languishing. Creating the type of facilitative environment that will produce an economy that is more robust. Implement the reforms that are necessary to create a more facilitative environment that leads to a more robust economy. The process of getting to this desired future, and the effort required, is the way we will pay for the past lunches we had...on credit. We must be smart and learn from history. Dependence on the vibrancy of the US is not as prudent a strategy as some persons like to espouse. While it might be true that “when the US sneezes, we catch a cold”, it does not always follow that when it “stops sniffling” our cold will also go away to the same extent. Post-2008 global financial crisis, The Bahamas never recovered well, consistently realising growth rates of less than 2 percent. This happened firstly because we failed to adjust and take greater risks for growth, and second because we were “forced” into fiscal consolidation and maybe went too deep, too quickly. This happened during a buoyant growth window for the US. To make progress we cannot afford to repeat the failings of the past.
We often look far afield for guidance. In this instance, I would recommend a careful study of Jamaica and how, as a colleague puts it, “it is emerging from the economic doldrums”. The study, though, should be properly contextualised for differences between the two countries. What lessons are there to be learned from what some may consider a lesser performing country. Mainly that discipline and commitment to sensible reforms has the ability to fundamentally improve the economic circumstances of the country. The fact is that the “emergence” that my colleague might be observing was realised because of what was “imposed” on the country through the vehicle of two successive IMF adjustment programmes. The “emergence” is the result of a suite of reforms, fiscal and structural adjustments, that led to a “freeing up” of expenditure, mainly from the reduction in national debt levels and facilitating investment in the economy. The outcomes are the “green shoots” and “new growths” being seen today. I believe that the earlier this path is taken, the more effective it will be for The Bahamas.
Senator Michael Halkitis, minister for economic affairs, in a recent interview with Marla Dukharan, alluded to employing some approaches that we have seen in Jamaica, such has having a private sector advisory body. He was “encouraged” to look at Jamaica’s Economic Growth Council and its efforts. While there is value for the engagement of private sector committees, the rubber will meet the road when the will to effect reforms become evident or otherwise. Here I use reforms very broadly to cover not only legislative and policy changes, but also behavioural changes necessary to facilitate and undergird effective governance.
We are at a critical point in the life of our nation. The nation’s fiscal health is in a perilous state, and this Ukraine war will not make it any easier. The need for action is clear. I am convinced that we have the competency at the level of national governance to navigate this perilous course, but it will require taking tough decisions. Our collective progress rests on quality, productive and principled actions. The way forward will require real commitment. The success of The Bahamas from this point forward is going to be through the greatest suite of reforms that the country has ever seen. The level and quality of governance is the critical ‘x-factor’, the thing that will be the difference maker.
NB: Hubert Edwards is the principal of Next Level Solutions (NLS), a management consultancy firm. He can be reached at email@example.com. He specialises in governance, risk and compliance (GRC), accounting and finance. NLS provides services in the areas of enterprise risk management, internal audit and policy and procedures development, regulatory consulting, anti-money laundering, accounting and strategic planning. Hubert also chairs the Organisation for Responsible Governance’s (ORG) Economic Development Committee. This and other articles are available at www.nlsolutionsbahamas.com.