The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government will realise just over half of its projected Value-Added Tax (VAT) net revenue increase in the first year, the International Monetary Fund (IMF) has warned, with forecast increases in Customs and real property taxes also over-optimistic.

The IMF, in its long-awaited Article IV report on the Bahamas, said the likely delays in implementing VAT, and this lack of nation’s inexperience in managing it, given the absence of an already-existing consumption tax, meant first year revenues from the new tax were likely to amount to just 1.3 per cent of GDP.

That percentage is almost a full percentage point lower than the 2.2 per cent net revenue gain the Government is forecasting. In dollar terms, assuming an $8 billion Bahamian GDP, the IMF’s 1.3 per cent is equivalent to a $104 million revenue increase - more than $70 million below the Government’s $176 million.

The Article IV report also suggested that the Government had over-estimated the revenue boost it would receive from ongoing Customs and real property tax reforms.

While the Ministry of Finance has pegged the improvement as equivalent to 0.5 per cent of GDP for Customs, and 1 per cent for real property tax, the IMF’s are 0.3 per cent and 0.6 per cent, respectively.

Collectively, the IMF’s projections are for revenue improvements that, in dollar terms, are $48 million below the Government’s for Customs and real property tax reforms.

The Fund, meanwhile, placed delays in implementing fiscal consolidation as among the risks likely to have the greatest negative impact on the Bahamian economy, alongside crime, a major hurricane, another US fiscal shock and “disappointing results” from Baha Mar’s operational start.

Apart from crime and a natural disaster, the IMF rated a delay in fiscal consolidation as the most likely of these scenarios to happen - something that could “pose risks to long-term debt sustainability and the country’s investment grade credit rating”.

This again shows the pressure the Government is under to make meaningful revenue and fiscal reforms, while at the same time doing nothing that would impair economic growth.

It also highlights the dilemma facing the Christie administration and private sector, which have agreed that reform must happen but are divided on the ‘what’ and ‘how’. In trying to ensure the Bahamas makes the right decision, neither can delay indefinitely.

Touting VAT as providing “a more efficient means to broaden the tax base, increase revenues and improve the effectiveness of tax administration more generally”, the IMF report said the proposed 15 per cent rate, based on experience, was likely to generate gross revenues equivalent to 7 per cent of GDP.

This translates into $560 million, in line with the Government’s projections, with the Christie administration’s VAT net revenue gain pegged at 2.2 per cent of GDP.

The IMF, though, cast doubt on whether the Government would hit that target in the 2014-2015 fiscal year, if indeed it is introduced in time, due to “capacity limitations in revenue management”.

“Other limiting factors in the initial year of the reform include delays in rolling out the public campaign and securing passage of relevant legislation in Parliament, which could complicate the timely acquisition and testing of IT systems needed in both the public and private sectors,” the Fund added.

“The absence of a consumption tax, and the lack of local experience in its management, would contain the initial revenue gains from the VAT as well. Because of these constraints, staff projects the net revenue gain from the VAT at 1.3 per cent of GDP for the initial fiscal year 2014-2015.”

The IMF warned, though, that failing to implement VAT would see the Government’s fiscal consolidation plans “veer considerably off track”, with the central government’s debt-to-GDP ratio “already above” 60 per cent by the time the next fiscal year starts.

“Staff underscored setting the VAT base as broadly as possible, and encouraged the authorities to ensure that adequate efforts and resources are deployed to secure the timely implementation of the reform,” the Fund added.

It also disclosed that, combined, the Customs and real property tax departments were generating revenues “below 50 per cent of the potential”.

“The Bahamian Customs and real property tax departments rely heavily on manual procedures and outdated information systems. As a result, revenue collection is currently estimated at below 50 per cent of the potential,” the Article IV report said.

“Envisaged reforms aim to bring management of the two revenue agencies up to international standards, involving extensive computerisation of revenue assessment and collection functions, and introduction of risk-based monitoring of operations.

“Staff concurred with the authorities that reform of the two revenue departments could yield significant revenue gains. However, given pervasive capacity limitations and the record of low tax compliance, staff urged caution in factoring the anticipated revenue improvements into the medium-term fiscal framework.”

Elsewhere, the IMF report showed that collective public corporation debt (guaranteed by the Bahamian taxpayer for the likes of Bahamasair, Water & Sewerage etc) had increased from 10.5 per cent of GDP in December 2008 to 16 per cent at end-June 20134.

“The Bahamian public corporations continue to face significant financial challenges, notably stemming from inefficiencies in operations (excessive staffing, aged facilities), but also reflecting these entities’ tacit social duty to provide affordable services to all residents including in remote Family Islands,” the Fund added.

The Government’s fiscal plan calls for tax revenue to increase by an average 0.8 percentage points of GDP over the next five years, with the debt-to-GDP ratio falling from a 59.5 per cent peak to 55 per cent by the 2017-2018 fiscal year.

The bulk of the revenue increase will come from VAT, with “only moderate savings achieved on government expenditures in view of limited spending flexibility”.

With Baha Mar and other projects set to boost private sector employment prospects, the IMF said 
“pressure on central government hiring should be manageable beyond 2014, permitting limitation of wage outlays to the last three years’ average of 7.4 per cent of GDP”.

But, despite government projections that the existing 1.9 per cent primary budget deficit will be balanced by the next fiscal year, the IMF warned that there were “downside risks” due to over-optimistic fiscal and growth forecasts in the past.

“The forecast track record shows a tendency toward optimism in staff forecasts of real GDP growth and the primary balance, pointing to downside risks to the baseline scenario. This underscores the need for rigorous adherence to the ongoing fiscal consolidation programme,” the IMF said.