The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Inter-American Development Bank (IDB) has criticised the Government’s debt management strategy, warning that its reliance on domestic investors to cover a $1.2 billion financing gap would “likely be more expensive” and create an increased fiscal burden.

The Bank, in its newly-released 2013-2017 country strategy for the Bahamas, noted that the Government would seek to raise “at least 50 per cent” of its financing needs - some $600 million - from domestic capital markets for this period.

Yet it expressed concern that this strategy would be more expensive (high interest rates), and “on worse terms”, than the Government could obtain via other financing sources.

Acknowledging that the Government’s determination to arrest its fiscal decline, and secure its sovereign credit rating, was justified, the IDB said: “The debt sustainability analysis performed by the Bank shows that the level of debt is expected to remain at sustainable levels in the medium term under alternative scenarios.

“However, the debt management strategy adopted by the Government could hinder the profile of the debt and increase its burden on the fiscal account,” it warned.

“The Government stressed its intentions to focus the financing of its fiscal gap on the domestic market (and some portion on the international market) that will most likely prove to be more expensive and on worse terms than other sources of financing.”

Such concerns from a highly-respected institutions like the IDB add a new element to the raging debate over tax and fiscal reform in the Bahamas, and raise questions about how the Government is managing its debt - and whether it is getting ‘best value for money’ from its proposed financing plans.

The better the interest rate and terms, the lower the Government’s financing costs, and thus a smaller burden imposed on Bahamian taxpayers when it comes to debt servicing.

The IDB report also drew further attention to the spending side of the Government’s fiscal equation by noting that the absence of a long-term economic development plan resulted in “ad hoc” expenditure decisions that were politically motivated.

“On the expenditure side, the main challenges are the lack of a consolidated and publicly consulted long-term economic development strategy, which tends to cause decision-making to be ad hoc and subject to political influences rather than efficiency criteria, leading to inefficiencies and inconsistencies,” the IDB added.

Apart from this the Bank, said difficulties in prioritising government investment projects “reduce the effectiveness and transparency of public expenditure”, while state-owned enterprises such as Bahamasair represent a continual drain via cash transfers and their contingent liabilities.

Noting the proposed arrival of Value-Added Tax (VAT), the IDB said the existing Bahamian tax structure “lacks transparency and distorts the economy”.

It added: “The fiscal situation in the Bahamas has deteriorated relatively quickly due to a sustained level of expenditure in the face of reduced revenue streams.

“The revenue base is very narrow, as it relies heavily on trade and tourism taxes, and there are neither income nor Value-Added taxes. In addition, to reduce the negative effects of trade taxes on investment, the Government has introduced several ad hoc tax schemes based on waivers and incentives. As a result, the tax system lacks transparency and distorts the economy.”

And, notably, the IDB also said the Government’s failure to enforce and administer the existing system had player a large part in reaching the current fiscal situation .

“The relatively low tax burden is also attributable to the extremely weak institutional capacity of the Customs and tax administrations,” the Bank charged.

“Tax administration capacity is weak, particularly for inland revenues. Part of this weakness is due to the current tax structure. The Customs Department collects taxes on international trade and excises, while the administration of the inland or domestic revenues is dispersed across some 30 other ministries, departments and agencies. There is also room for improvement in the real estate tax.”

The Government is moving to address the latter concerns via the creation of the Central Revenue Agency and its VAT unit.

The IDB report added that real property tax studies had shown there was a “potential increase in property tax collection of up to 100 per cent over a five-year period” via improved valuation and enforcement efforts.

“The Government’s debt management strategy limits the size of the Bank’s financial support during the strategy period,” the IDB said, adding that its total financial support for the Bahamas over the 2013-2017 period would be held to $150 million.

“The Government envisages mobilising funds from the domestic market to satisfy at least 50 per cent of the estimated $1.2 billion financing needs during the country strategy period, as well as accessing the international financial markets and reengaging with other multilateral development partners.”

The IDB said its financial support would have “a heavy emphasis on investments”, as well as initiatives tailored to policy support.

It added: “Average annual approvals [for IDB financing] are expected to be $30 million, compared to the annual average of $73 million for 2010-2012.

“Yearly disbursements are expected to average $34 million, compared to an average of $53 million under the current country strategy. Net flows are expected to be positive provided that new loans enter the portfolio in 2014.”

The Bank added: “The current outstanding debt to the IDB accounts for 5 per cent of total debt, and 25 per cent of external debt. The IDB’s exposure is expected to maintain its level as a percentage of total debt, but to decrease as a percentage of external debt.

“Additionally, consistent with historical levels, total grant funding for technical assistance and investment grants over the country strategy period is estimated at $6 million.”