The Tribune

By BRIAN SEEL

The Bahamas is now three years into a recovery from the devastating effects of Hurricane Dorian and the COVID-19 pandemic, which hit the country only four months apart in 2019- 2020 and wreaked havoc on the economy. Real gross domestic product (GDP) fell by 24 percent in 2020 alone, while the debt burden skyrocketed from 60 percent of GDP just before the crisis to 100 percent at its peak in 2021.

Bad luck is partially to blame for The Bahamas’ fiscal issues. Hurricane Dorian was one of the most severe storms on record, and no government accurately predicted the timing and scope of the pandemic. Their combined impact required an immediate fiscal response, even as The Bahamas’ tourism-dependent economy came to a halt and government revenues collapsed. A deterioration in debt sustainability was understandable - even unavoidable - although the costs to macroeconomic stability were high.

The twin crises put tremendous pressure on the Government’s finances. At times, it even appeared as though it would default on its debt. Thankfully, aggressive action by Prime Minister Philip Davis and his team prevented that outcome, and over the past several years the fiscal outlook has improved significantly. The Budget deficit shrank from a peak of 13 percent of GDP in 2021 to under 4 percent in 2023, and the debt stock fell over 15 percentage points to an estimated 84 percent of GDP at the end of 2023.

The Government deserves praise for stabilising its finances under difficult circumstances - it was no small feat. However, it should do more to ensure that recent gains translate to permanent fiscal sustainability, and it should increase its efforts towards building buffers against future unexpected shocks. It should also consider an International Monetary Fund (IMF) programme, which would help on both fronts and significantly lower its borrowing cost.

Towards fiscal resilience

On the fiscal side, the main challenge for the Government going forward will be to avoid complacency. For example, while the Budget has an ambitious 0.9 percent of GDP deficit target for the current fiscal year ending in June 2024, the deficit was already running around 0.8 percent of GDP as of October 2023 according to the latest data available, only a third of the way through the fiscal year. On that trajectory, a 2.4 percent of GDP deficit looks more likely - a miss of about 1.5 percent of GDP.

While that would still be a major improvement relative to the prior fiscal year, a missed deficit target could expose the Government to claims it is wavering on its fiscal commitments. If the numbers do not improve quickly, it should introduce new fiscal measures, especially on the expenditure side, and take care to present more realistic targets in the future.

Another option would be to consider an IMF programme. While this will undoubtedly prove controversial given the Government’s prior reluctance to engage with the IMF, the financial benefits would be immediate and substantial.

Take The Bahamas’ Caribbean neighbours, Jamaica and Barbados, for instance. Jamaica’s debt stock was estimated at about 72 percent of GDP at end-2023, only slightly less than The Bahamas, yet its borrowing cost in international markets is about 3 percentage points lower. Barbados, on the other hand, had an estimated debt-to-GDP ratio of 115 percent of GDP, much worse than The Bahamas, yet its borrowing cost is still a full percentage point lower.

What is the difference? While both countries did have slightly better fiscal balances last year, the major driver of The Bahamas’ higher cost of financing is the lack of an IMF programme.

Importantly, the IMF offers several types of programmes, and not all of them come with onerous D.C-directed conditionality. A Policy Coordination Instrument (PCI), for instance, does not offer direct financing but would leverage IMF technical assistance and help the Government signal a strong reform commitment to markets via a largely home-grown programme. A PCI may also enable The Bahamas to tap the IMF’s Resilience and Sustainability Facility, which offers cheap financing to mitigate risks related to climate change - something The Bahamas badly needs.

Access to cheap financing would free up cash currently being spent on interest for other items, such as social spending, infrastructure or building up a rainy-day fund. An extra benefit of an IMF programme, even an unfunded one, would be the likely significant reduction in commercial borrowing rates.

The Davis administration has already taken some steps in this direction through its work with the Inter-American Development Bank (IDB), which recently provided a partial guarantee for commercial borrowing. Signing on to an IMF programme would be a logical extension of these efforts as the Government would receive interest relief in exchange for reforms it intends to implement anyway. Far from suggesting weakness, it would imply savvy on the part of the Government, as well as signal a strong commitment to reforms that will pay dividends for generations of Bahamians to come.

NB: Brian Seel is a senior sovereign analyst with the Artisan Partners EMsights Capital Group in Boston. His team invests in government debt around the world, including in The Bahamas.