The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Total debts owed by the Government’s state-owned enterprises (SOEs) have hit $1.4bn to become “a significant risk” by exceeding 10 percent of annual economic output, the IDB has warned.

The multilateral lender, in its latest quarterly Caribbean quarterly bulletin that focused on the region’s debt issues, voiced particular concern about SOE debt that is not guaranteed by the Government given that taxpayer subsidies to these entities have increased especially following the COVID-19 pandemic.

While government and SOE debt cross-holdings provide some modest mitigation, the Inter-American Development Bank (IDB)” said the financial demands imposed by the likes of the Public Hospitals Authority (PHA), Bahamasair and Water & Sewerage Corporation are among three “key factors” it identified as influencing The Bahamas’ overall “debt stock”.

“Contingent liabilities are another key aspect of public debt in The Bahamas,” the IDB report said. “The total debt of state-owned enterprises (SOEs) and other government agencies reached $1.39bn or 10.1 percent of GDP at the end of the 2023 second quarter as the pandemic raised financing needs for some of these entities.

“Adding the total debt from SOEs to central government debt increases the public debt-to-GDP ratio from 82.1 percent to 92.3 percent of GDP. However, since the central government holds debt from these SOEs and some of them also possess central government debt, the consolidated public debt-to-GDP ratio declines to 87.7% percent of GDP.

“While the debt-to-GDP ratio of SOEs has decreased over the last four years, the share of non-guaranteed debt is still a significant source of risk, particularly when considering that central government assistance to SOEs has increased over the years. Strengthening SOE governance and operational efficiency will be key to mitigate this risk.”

Total taxpayer subsidies to loss-making SOEs were projected to decline by a combined $47m this fiscal year, falling to $455.229m compared to $492.24m in 2022-2023. The latter itself represented a decline from the $564.393m provided in 2021-2022 in COVID’s aftermath.

Elsewhere, the IDB identified “underfunded pension systems” as a further fiscal risk for the Government. It especially cited the ‘pay as you go’ pension for civil servants, which are 100 percent funded by taxpayers in the annual Budget and to which the beneficiaries presently make zero contribution towards their retirement costs.

“Another source of contingent liabilities is underfunded pension systems. While the non-contributory public pension system of The Bahamas is currently funded by the Budget, it is increasing upward, with population aging adding more risk to the trend. Some estimates point to public and private pension systems possibly running out of funds by 2029,” the report added.

Bahamian taxpayers are due to fund an estimated $134.744m worth of pension payments to retired civil servants during the 2023-2024 fiscal year, representing a slight increase from the prior year’s $130.876m. Together with $33.776m of gratuities, the total bill for 2023-2024 is projected at $168.52m.

Meanwhile, the IDB estimated that COVID-19, together with hurricanes Dorian, Irma, Matthew and Joaquin, added some 12.7 percentage points to The Bahamas’ debt-to-GDP ratio in the eight years since 2015 by creating major holes in the Government’s financial projections.

The four hurricanes alone were said to have collectively expanded the Government’s primary deficits, which measure by how much all non-interest spending exceeds revenue income, by a sum equal to 7.5 percentage points of GDP.

“Together with the impact of the COVID-19 pandemic, this added almost 13 percentage points to the debt-to-GDP ratio over the last eight years through higher-than-anticipated public expenditures and therefore higher-than-anticipated primary deficits,” the IDB report said.

Nevertheless, the multilateral lender praised the Government for acting “soundly” to address fiscal concerns by developing a medium-term debt strategy and implementing operational reforms via the Revenue Enhancement Unit and Debt Management Office. However, it said the Davis administration’s fiscal targets for 2023-2024 and upcoming years “seem ambitious”.

“The current Budget expectation is that revenues will increase 14 percent above those in the revised budget for fiscal year 2022-2023, equivalent to two additional percentage points of GDP in tax revenue in a single year, and that total expenditures will continue a downward trend but recurrent expenditure will increase by 0.4 percent of GDP,” the IDB added.

“This implies a primary fiscal surplus rising from $39m to $486m (3.3 percent of GDP). In this context, the fiscal goals set for this year should be monitored early in order to react swiftly by adjusting not only the budget goals but also the medium-term fiscal strategy.”

The report suggested that The Bahamas could benefit from targeting the 66 percent debt-to-GDP ratio that the IDB has recommended all Caribbean tourism-based economies adopt. “Given the efforts that have been made to regain market confidence, the Government might benefit from adjusting its fiscal framework towards one more in line with the history and recent structure of the Bahamian economy,” it added.

“An adjustment of that kind could be complemented with the introduction of an automatic adjustment mechanism like the one implemented in Jamaica. Moreover, the necessity and the opportunity to build fiscal buffers could not be greater now that the Bahamian economy is in the middle of a tourism boom.

“In this regard, the reestablishment of the Natural Disaster Fund - which in essence is also a macroeconomic stabilisation fund - will not only improve resilience against natural disasters but also help bring down the debt ratio toward more prudent levels. Last but not least, securing broad support for implementation of the ongoing and upcoming revenue and expenditure measures will be essential to achieving all these goals.”