We previously considered The Bahamas’ debt sustainability, and looked at the challenges faced from a Caribbean context. Today the Government’s 2022-2023 Budget will be unveiled. In my view, the critical takeaways from the presentation should be fundamental reform of state-owned enterprises (SOEs) and the civil service; updates on tax reforms and new/increased taxes that will generate the momentum needed to achieve a 25 percent revenue-to-GDP ratio by 2025; eliminating structural impediments, especially in the energy sector; increasing social services spending; strategy adjustments for healthcare and education; a clear plan for economic growth strategies and initiatives; and, extremely important, adjustments to the debt management strategy. Debt is, and will likely remain, an uncomfortable Achilles heel for The Bahamas.
The debt trap
The Bahamas finds itself in somewhat of a debt trap. With the national debt now around $10.5bn, and annual interest payments on this amounting to $512m, representing 23 percent of revenue and 18 percent of total Budget expenditure, respectively, the country is carrying a significant burden. Given the current realities and ongoing borrowing needs, this burden will likely increase further. The national debt is one of the most critical issues to be addressed during this Budget cycle. When $500m of a $3bn spending budget goes to servicing interest payments on debt, it is beyond time to start taking close notice and implement real action. The Bahamas is struggling with two important challenges - low growth and high debt. Fixing both, concurrently, is fundamental to an improved economic condition.
To put these challenges in context, consider that in the last Budget we had a primary deficit. This measures the amount by which the Government’s recurrent (fixed cost) spending exceeds its income when interest payments are stripped out. Or, put another way, it is the amount by which the annual fiscal deficit exceeds those same interest payments. What this means is that we are actually borrowing to pay interest. This cycle, if not broken, will consistently tighten like a noose around The Bahamas’ neck. Escaping this trap by making some hard decisions, and taking definitive action, 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 on this path before for insight in what to avoid.
Barbados and Jamaica provide potent lessons as to what is at risk, and the potential upside of proactive reform strategies. Jamaica struggled with the burden of a debt-to-GDP ratio that peaked at more than 140 percent. Over two IMF programmes, this was reduced to below 100 percent for the first time in many years. This has been hailed as a success in allowing Jamaica to unlocking important resources that have boosted its economy, especially on infrastructure development. Barbados is currently going through its own crisis and, while struggling, it is being supported by the IMF, which enhances the likelihood of getting things right and setting the country on a better socio-economic path. In a recent Article IV report, the IMF said: “While Barbados has been making good progress in implementing its Economic Recovery and Transformation (BERT) plan to restore fiscal and debt sustainability, rebuild reserves and increase growth, it continues to face major challenges owing to the global pandemic. The outlook remains highly uncertain, and risks are elevated”
What are the main lessons here? First, and the most obvious, is that a country is unlikely to progress with debt at high levels. However, there are other finer points. With such high debt levels, there is a need for reform and discipline. Left unaddressed, drastic action will be required. Even with focused efforts it will require time, at the cost of great uncertainty, before a country emerges from the woods. The Bahamas’ debt-to-GDP is expected to remain in the 80 percent range over the near term given anticipated borrowing needs. Together with detailing strategies for economic growth, this Budget cycle must underscore that the country is caught in a debt trap and send clear signals of a commitment to improving its creditworthiness.
I wish to consider a few other consequences here. There is no doubt that increased debt levels can result in rising poverty. Having regard for what we discussed before, the impact of debt on private investment could lead to increased unemployment, while the affect on social safety nets will lead to vulnerable Bahamians becoming more disadvantaged. Factors such as these lead to economic scarring, especially following episodes of crisis, translating into a generational disparity in wealth and increased poverty.
High debt results in a reduction in the national savings rate, and affects the ability to create buffers against economic shocks. One formula for national resilience is to invest in sustainable growth, and carve out savings for counter-cyclical spending or “saving for the rainy day”. It is a formula that we recently observe at play in the likes of the Cayman Islands, and both Trinidad and Jamaica to a lesser extent. The Bahamas is unable to achieve this with its high debt burden and low growth, apt evidence of how both affect the performance of the economy, resulting in a lack of resilience.
As more money is borrowed, more resources are needed for debt servicing, and more and more will be taken away from other public services. This is never a sustainable approach. At some point there will be a need for increased revenue. This will require increased taxation, and this is where The Bahamas is today. The Government has laid out its intent to increase revenue to 25 percent of GDP by 2025, up from the present 18 percent, and there should be every expectation that in this Budget cycle there will be some marked changes with a foreshadowing of more to come for 2023-2024. There is no “painless” path to a fiscal surplus.
The final consequence I want to share is this. A country with high - and growing - levels of unsustainable debt, and which fails to find internal solutions, will ultimately have to look to external partners for help. I want to be very clear: I do not believe that The Bahamas is anywhere near an IMF structural adjustment programme. I believe there are many options available to the Government at this time to make such “local adjustments”. However, what I seek to do here is state as objectively as possible, and in general support of the revenue trajectory projected by the Government, that increased deficit spending without reforms in multiple areas of the economy and government policy will definitely increase the possibility of finding ourselves in that unenviable position.
Searching for Solutions
There is no value in a discussion without exploring solutions. I do not claim to have the answers, but some broad themes exist. The Bahamas must diversify its economy; it must implement greater reforms to facilitate effective public financial management and governance; it must reduce the national debt to more sustainable levels (this does not automatically translate to 50 or 60 percent debt-to-GDP); and it must address structural impediments to economic growth. While the Budget is narrowly focused, permit me to raise some questions on what is needed to carve a path to economic and fiscal sustainability and resilience.
What do we want The Bahamas’ economy to look like? What will tourism look like? What will financial services look like, especially with digital assets? What do we want to see in agriculture over the next five years? What sectors are ripe for policy support? What legislation and policies do we have languishing which, if repurposed, can add value? How does governance impede economic growth? Is there value in devolution and local government? This Budget should bring the answers to these questions together.
Which sectors of the economy are causing a drag on others? What are the unexplored pockets of value we have ignored because of entrenched thinking? How can we add greater diversity to the economy? How can we diversify tourism? What values are locked-up in “Historical Bahamas”? Are there social assets, such as diversity of culture, that we can take advantage of? How do you diversify without a broader skill-set? Does Immigration hold any value in diversification? How do we influence greater trade? How do we restate a policy of Bahamianisation for the 21st century based on fairness and empowerment, economic inclusion and social equity? The diversification question looms large and should be answered clearly.
What exactly will the tax regime look like? What tax regime would provide the greatest future value for the country? How can our fiscal policies (taxes and investment incentives) be exploited to drive Family Island economies? How do we create a more vibrant capital market? How do we create a more vibrant funding machinery for businesses? What is the role of University of the Bahamas, and academia in general, in creating centres of excellence? How would a financial services sector thrive in an environment with a recognised school of banking?
Are there opportunities in CARICOM? How can we leverage the Caribbean to improve the domestic economy? How can the region be used a first step to greater food security and exports? What opportunities are there for intra-regional trade? What is our targeted GDP in 10-15 years? How do we get there? What industries are primed to help us do that? What reforms are needed to unlock economic value? How do we achieve them?
I believe we have the capacity to face all our challenges, provide the necessary answers and act in the best interest of the county. However, we must all be mindful that this is not simply a task for government. We all have a role to play in this process. Every segment of society must actively participate in the drive for greater economic development and resiliency. Take time to understand the issues, support positive developments and offer suggestions. Due mainly to the debt and the pandemic, this Budget might be the single most important in the life of the country. It must pave the path, and lengthen the runway ,to the future. It must be focused on the decisions to be taken today that will lead to a better tomorrow.
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.