The Davis administration has delivered a Budget which, while leaving room for discussion and debate on many fronts, gives numbers which are very positive and welcoming news from a fiscal and debt management perspective. The projections suggest that The Bahamas is on the path to a turnaround in its fortunes, providing international and domestic investors with a level of certainty that would not have been anticipated two years ago. But every aspect of this turns on what the final outturn of the 2022-23 fiscal year will be.
Positive numbers
In 2021, shortly after the election, I had the privilege of attending a meeting with the Prime Minister as part of a team paying a courtesy call. At a point in the meeting he turned unexpectedly to me and asked how things were going, and what my views were. My response was that he had been elected at a very critical point in the history of the country. I then went on to indicate that the importance of the moment lies in the fact that, if his administration failed to get the next five years right, the cost could be very high. As a result, we must all be fully aligned and supportive of the need for his administration’s success.
Having regard for the then-prevailing COVID pandemic, and the destructive effects of Hurricane Dorian, such a statement could have easily been uttered by anyone without much thought. My position remains the same, and it is against this backdrop that I view the 2023-2024 Budget presentation. The signals so far, where the numbers are concerned, create some level of optimism.
The high point of the presentation in my view was the fact that the projections outlined in the earlier Fiscal Strategy Report 2022 were clearly followed almost to the penny. I previously took the view that it would have been “a big ask” to secure a 79 percent reduction in the fiscal deficit in 2023-2024, as was then projected. The trends suggested that while the economy was rebounding well from COVID, and at a faster pace than initially anticipated, there was the likelihood of an early plateauing and, with the administration’s early declaration of no desire for new and/or increased taxes, achieving this target would have been challenging. The reality is that revenue is projected at $3.3bn for 2023-2024, increasing steadily to 2026-2027, where it will hit $4bn and drive a fiscal surplus. The current fiscal year is anticipated to generate $2.9bn in revenue, with a projected deficit of $520m.
Despite the Prime Minister stating that there are no new taxes in the Budget, it is evident that there has been increases in a number of areas. The administration has found ways to stretch the current tax base to meet its objectives. It is my view that the Davis administration should be commended for seeing the need, acknowledging the challenges and taking the bold steps to secure the revenue needed. One cannot, however, get past the fact that the 2022-2023 performance which was reported is only for the first nine months, and the language used in predicting the full year outturn by the Prime Minister is extremely conservative and hedging in some regards.
That said, should these numbers hold true, it would represent a major and important accomplishment. It remains no secret that The Bahamas can ill afford another credit rating downgrade in light of the current struggles with its debt circumstances. It is imperative that the final quarter of 2022-2023 perform as projected or closely thereto. The implications of it being otherwise have adverse implications.
When Simon Wilson, the financial secretary, recently said the Government has launched “the most co-ordinated tax collection and enforcement effort ever", and that “the country must realise its targets for 2022-2023”, and that “a lot of fiscal pressure is alleviated when everyone pays taxes due”, among other things, he was effectively laying out and rationalising what the potential cost of getting it wrong may look like. He said: “We don’t want to raise tax rates... We always have a choice from a broad range of options, but by far the most palatable option we have is improving our compliance”. At face value, a clear and unequivocal statement, and on analysis one that goes fundamentally to the root of a very complex set of circumstances facing policymakers. Get 2022-2023 wrong and the shifts could be potentially seismic.
The expected outturn for the current fiscal year is presented with greater precision than is evident in the current Budget. The Prime Minister, in declaring the revenue performance, said: “I am confident the revenue outturn at the end of the fiscal year 2022-2023 will near $2.9bn”. With respect to expenditure, the statement was even less precise “...Expenditure at the end of fiscal year 2022-2023 will almost reach the target of $3.1bn set in the supplementary Budget.”
Having followed and analysed budgets for over a decade, my preference would be to have seen the normal approach, which sends a clear signal that there is a narrow room for differences. In analysing, it must be assumed that they did their homework well and therefore the numbers are likely to be as stated.
Beyond the numbers
Hawksbill Creek Agreement - The Budget presentation has drawn attention to a very important issue - that being general concern for the performance of the Hawksbill Creek arrangement in Freeport. The Prime Minister was unequivocal that there is dissatisfaction with how that is currently working. Subsequent commentary suggests that the matter could be differently argued. It remains, though, maybe one of the most significant pronouncements which, though important, is unlikely to have any near term impact on the fortunes of the country.
The importance of this arrangement must be acknowledged, and the extent to which it fails to meet objectives must be addressed in the interests of The Bahamas, based on full factual analysis and expert participation. Respecting the complexity of the issues, commentary on this is better left to subsequent developments and the intervention of more knowledgeable and closely associated parties.
Government Financing – The numbers augur well for the financing needs of the Government, which is projected to decline over the next four years. With the cost of debt averaging 5.5 percent, and a growth rate of well upwards of 4 percent, needed to achieve the $16bn economy by 2027, the country is operating in interesting circumstances. What is most critical, though, from the Budget communication is the means by which the Government will seek to access lower cost funding. As was done recently, it intends to leverage institutions such as the Inter-American Development Bank (IDB) to secure credit risk enhancement.
Therefore, while the numbers are indicative of a march in the right direction, it is clear that The Bahamas is still not out of the woods from a credit perspective. With still seemingly limited options in the domestic market, it is important to pay attention to this policy position and be clearly informed by the realities given the recent struggle to seamlessly secure funding for known borrowing needs. Next year's projected Budget performance could represent a watershed moment, and an important turning point for the country’s debt management. This desired outcome must be viewed against the fact that 20 percent of total expenditure goes towards payment of interest on debt. The ability of the country to reduce the cost of borrowing holds serious implications for social and infrastructure advancement. When a fifth of all spending is on debt, domestic or external, and with slippage in performance that amount would grow, everyone committed to the success of the country must have a desire for a fundamental turnaround. In this regard the numbers must hold and projections be achieved.
In Part II, I will take a look at some of the major policy statements emerging from the Budget and suggest what might have been missing from the presentation.
NB: Hubert Edwards is the principal of Next Level Solutions (NLS), a management consultancy firm. He is currently a student at the Eugene Dupuch Law School. He can be reached at info@nlsolustionsbahamas.com. Hubert 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. He 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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