0

IMF urges Bahamas to stick to 50 percent debt ceiling

By YOURI KEMP

Tribune Business Reporter

ykemp@tribunemedia.net

The International Monetary Fund has urged The Bahamas to keep to the 50 percent debt ceiling passed in 2018.

The fund, in its latest Selected Issues report on The Bahamas, said that debt rules under the current Fiscal Responsibility Act (FRA), 2018 remain “appropriate” despite the fallout from Hurricane Dorian in 2019 and the following COVID-19 pandemic.

Saying that the Act followed the IMF’s recommendations at the time for a “rules-based framework” with two operational targets for an overall deficit rule and a cap on recurrent expenditure growth, the fund added: “Simulations in 2018 suggested that a 50 percent debt anchor would be appropriate for The Bahamas as this would ensure that the country’s debt would remain below the ‘critical-debt’ benchmark of 70 percent of GDP for emerging markets even in the face of large shocks.

“To reach that debt ceiling within a decade, while allowing a three year transition period towards the operational targets, required an overall budget deficit of one percent at the time. Staff also recommended setting up a savings fund for natural disasters, requiring additional savings of 0.5 percent of GDP, suggesting a headline deficit target of 0.5 percent of GDP.”

The fund added: “The FY2018/19 overall deficit was in line with the path set by the 2018 FSR, but Hurricane Dorian in September 2019 forced the government to trigger the escape clause and delay the achievement of the operational targets to FY2024/25. As a result, the envisaged convergence to the debt ceiling was also delayed to FY2028/29. The COVID-pandemic, which led to an unprecedented downturn, required the continued use of the escape clause, and further delayed the achievement of the fiscal targets. As a result of the unprecedented collapse in revenues and significant COVID-related spending support, the deficit reached almost 14 percent in 2020/21, and debt increased to more than 100 percent. The government now intends to achieve the deficit and debt targets by FY2024/25 and FY2030/31, respectively.”

Dealing with a post-pandemic Bahamas would mean the country must “develop a credible and achievable fiscal consolidation path”, among other things.

The fund added: “Despite these challenges, staff still sees a long-term debt ceiling of 50 percent as appropriate.”

It noted that the target applies to central government, and that consolidated public debt today is about six percentage points higher than central government debt and secondly, “the vulnerability of the Bahamian economy, especially against climate change would require high fiscal buffers, especially in the absence of other insurance mechanisms against natural disasters”.

The fund acknowledges in their scenarios that debt would stay above 80 percent of GDP for year 2030/2031 assuming that all COVID-19 related spending measures are fully phased out in the upcoming budget for fiscal year, 2022/2023.

The fund also calls for The Bahamas to “modify” the timeframe towards achieving the debt target.

“According to the latest Fiscal Strategy Report, the authorities aim to run an overall surplus of 1.5 percent of GDP by FY2025/26, to be achieved through raising the revenue to GDP ratio to 25 percent (mainly through tax administration improvements), reducing current spending to 20 percent, while permanently increasing capital expenditure to 3.5 percent of GDP. They still aim to reach the debt target of 50 percent by FY2030/31. Given the severity of the shocks, consideration could be given towards delaying the achievement of the debt target by at least two years.”

Comments

Sign in to comment