HUBERT EDWARDS: The IMF’s ‘inconclusive’ concluding statements


Hubert Edwards

This article concludes my assessment of The Bad points in the International Monetary Fund’s (IMF) recent Article IV statement on The Bahamas, starting with the recommendation for increased interest rates and then considering The Concerning issues.

The Bad

Increasing interest rates tends to have some other interesting impacts on a country. Starting with the obvious increase in borrowing costs and mortgage payments through to a reduction in investments and consumption, which all leads to less economic growth. Given where the economy is today, why would the authorities place the fledgling economic recovery at risk? Why would the Central Bank seek to dampen consumption in a largely mercantile-driven environment? The effect that increased interest rates, as a monetary policy, may have on inflation is not much of a factor here in The Bahamas. Indeed, it is almost a non-factor, so why point us in that direction? While correctly pointing out the need to focus on vulnerable segments of the population, the IMF statement seems to ignore the negative impact an interest rate hike would have on investor and consumer confidence. From a national perspective, government costs would increase on domestic floating rate debt, making an already bad situation worse. Just emerging from a significant financial crisis, the already-high unemployment rate could be exacerbated with an increase in interest rates. On this basis, I believe that the IMF recommendation begs for greater assessment.

From a macroeconomic perspective, taking into account all the nuances of the Bahamian economy, what would be the most likely outcome of an interest rate increase? Reduced consumption. Is it therefore reasonable to speculate that the IMF is, given its concern about the risk to economic recovery, harbouring concerns regarding the robustness of the country’s reserves and balance of payments? Is the IMF, in a back-handed way, suggesting that The Bahamas should cool-off the demand for import dollars as it keeps an eye on the improving - but “not yet there” - export-related foreign currency inflows”? On the other hand, maybe the IMF did in fact say that when it stated: “If the market environment were to deteriorate markedly, consideration may need to be given to a temporary tightening of capital flow management measures.” It said this after stating very early in its statement: “The tourism recovery is projected to narrow external imbalances over the medium term, and thereby keep international reserves at adequate levels.” I take the view that the IMF’s concluding statement seemed to say much less than intended. What is clear is that when we move around and examine statements, as we are doing here, they seems to take on less of a cryptic nature but are still very indirect.

Policymakers are unlikely to act on the increased interest rate recommendation. However, the warnings stated or implied should not be ignored. The desire for fast fiscal consolidation should not drive over-optimism. Plans and projections should be balanced, making clear allowances for downside impacts. Attendant or supporting strategies should be clearly communicated early to facilitate private sector adjustments. All this should be done without leaning towards introducing unnecessary pessimism, or taking action that might “shock” the market, disrupting existing value propositions or harming long-term potential.

The Concerning

As policymakers work hard to reposition The Bahamas, they are caught in a web of tensions. The fight for progress is between pursuing increased revenues and how to respond to the braking effect of the current debt burden, which is driving the need for increased revenue. It is not an argument many will have openly, but the implications are many. The recent mid-year Budget presentation give us glimpses of this. The projections through to the fiscal year 2024-2025 are clearly indicative of the administration’s desire to move the country along. The efficacy of the plans, though, is tied to the ability to finance current and expected deficits, manage the increasing level of interest payments and contend with the coming pressures as a resulting of debt maturities. According to the IMF: “The pandemic has deepened the country’s medium-term growth challenges and public finances have deteriorated.” The main concern is the extent of the weakened state, and therefore the significant narrowing of the margin for error when it comes to policy decisions and the execution of reforms.

When the IMF declares: “The Bahamas would benefit from a more robust multi-year debt management strategy”, one gets the clear impression they may not deem the current strategy effective. Bearing in mind that the IMF is highly focused on influencing policy, it is always likely to have an interest in what the current position is, and the migrating factors moving forward, if the circumstances are not highly favourable. Therefore, the statement: “Even with significant fiscal consolidation, financing needs will decline only gradually over the medium-term. This creates elevated risks of the country finding itself in debt distress. Mitigating these risks will require careful planning” suggests the extent to which fiscal consolidation is central to existing strategies. Maybe a more tempered approach should be taken.

Why would one conclude this? Consider your impressions when a policy-centric institution says: “The new debt management committee should systematically track performance of the recently published multi-year government financing strategy and undertake contingency planning to ensure the strategy is robust in a less favourable market environment.” Then ask what could constitute less favourable market conditions. An inflationary environment? An environment where it might be difficult to secure debt or, if so, at increased costs? An environment where the effects of a pandemic on education and employment cause pressure on a country’s social cohesion, resulting in the need for increased social support? What about imbalances in our tourist market from rising COVID cases, or pressure on disposable income as a result of global inflationary pressures? Consider your impression when the IMF cautions: “The Government should avoid undertaking strategies that may appear to reduce costs in the short-term but potentially exacerbate debt distress in certain circumstances.” What might the administration have done or be contemplating? Relating to debt, what would have prompted such a remark? As an observer, nothing readily comes to mind, but it is a rather intriguing statement.

There is no doubt that, at this point, debt represents the “Achilles heel” with respect to The Bahamas’ economic recovery. The actions taken by the Government, and conveyed by influential organisations such as the IMF, will have serious implications. It is imperative policymakers take the necessary actions that will generate confidence that the most practical, strategic and complete steps are being taken. Statements such as “The Bahamas would benefit from a more robust multi-year debt management strategy” carry a potentially negative message to the financial markets, which are already showing a negative outlook towards the country’s sovereign bonds, as these are trading at relatively high yields. The realities are such that whatever mechanism is in place for debt management, it must be clinical, effective and consistently sending the right message. Anything less carries potentially high costs through higher interest rates on new debt issues, an increased roll-over risk, an inability to finance projected deficit spending over the next two years, and increased likelihood of austere measures.

The Conclusion

The following statements from the IMF readily contextualise the level of uncertainty that The Bahamas faces. “Higher food and oil prices, including because of the effects of the war in Ukraine, could erode consumer demand and impose a particularly heavy burden on the vulnerable,” it said. This is an apt reminder of the adverse global influences facing those who are already challenged with economic distress. It continues: “In addition, a sharp rise in global risk premia could limit the ability to place new debt and further strain public and private balance sheets”, pointing to the risk of fall-out for both private and public sector. Fortunately, the Bahamas financial system has high liquidity levels, and therefore private debt might not be at the same level of risk as the public variety, which is already faced with significant yields in the international market. On one hand, there is the inescapable challenge of rising costs, and on the other there is the possibility for even greater pressures on the national debt. This will create even greater challenges for policymakers as they manage The Bahamas’ finances while searching for sustainable growth and greater resiliency.

Certain matters have become thematic in discussions surrounding the country’s economics, and the IMF raised spectres of doubt when it came to growth and the targeted allocation of resources. “A reprioritisation of public spending is also needed to promote better social and economic outcomes.” This effectively points to the fact that it believes government spending is not as productive as it could or ought to be. “While tourism will remain systemically important, the authorities have long recognised the need to diversify toward a more knowledge-based economy. A greater emphasis on energy reforms and educational programmes to improve the inclusion of young workers and the underemployed will raise growth potential.” The economy is in dire need of diversification and growth. Certain social underpinnings and broader growth reforms need urgent attention. No one should pretend that these are easy, but we also cannot afford to continue to act as if they are impossible either. A way must be found to move the needle forward on growth. A rearrangement of the IMF’s statement above makes the point: The Government should avoid undertaking strategies that may appear to be viable in the short-term but potentially exacerbate the economic distress of the country in the long-term.

Regardless of the nature or tone of the commentary, it is critical that where the suggestions make sense there should be wise movement in those directions. Given where The Bahamas is economically, it is important that we draw on all available sources in a serious and practical manner. This must be done with a view of solving the problems that currently ail us, and positions us for a more vibrant and resilient future - a future where we are able to better cope with the shocks, internal and external, that will continue to assail us. The IMF report, despite its seemingly paradoxical state, is one such important source.

NB: Hubert Edwards is the principal of Next Level Solutions (NLS), a management consultancy firm. He can be reached at info@nlsolustionsbahamas.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.


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