The Tribune

By NEIL HARTNELL Tribune Business Editor A FAILURE to rapidly implement tax reforms "could jeopardise a sustained recovery" in the Bahamas, the International Monetary Fund (IMF) warning the Government's plans were "not sufficient" to reverse a rising $4.25 billion national debt and fiscal deficits set to average 4.25 per cent of GDP over the next four years. The Washington-based Fund, in its full 2011 Article IV consultation report on the Bahamian economy, described tackling this nation's debt-to-GDP ratio, and the rate at which it is growing, as "the key policy priority" for the next government, noting this is projected to grow by some 25 percentage points over a seven-year period. The IMF warned that the borrowings associated with the Government's infrastructure upgrades had made the fiscal position more "vulnerable". And it also gave the Ingraham administration a veiled 'rap on the knuckles' for its decision to lift the public sector wage freeze imposed in the 2010-2011 Budget, urging that the Government's wage bill, as a percentage of GDP, to be slashed "to the pre-crisis level". The full Article IV report, while disclosing little that was not known in terms of the IMF's general view of the Bahamian economy, adds further 'meat to the bones' in terms of the urgency with which it wants the Government to tackle its weakened fiscal position. Implying that the Government needed to slow down its increased borrowing to meet infrastructure and social spending needs, the IMF warned that the main problem posed by the growing debt burden was increased servicing (interest) costs. These had the potential to draw resources and spending away from high priority areas, such as education, health and crime fighting. Underscoring the urgency of the situation, the Fund said: "The key policy priority is implementing a sustained fiscal consolidation. The public debt-to-GDP ratio is projected to reach 69 per cent by end of the 2015-2016 fiscal year, from 44 per cent in fiscal year 20080-2009." To tackle a fiscal deficit projected to average 4.25 per cent of GDP between 2011-2012 and 2015-2016, the IMF is urging a balanced approach, combining tax reforms with measures to contain spending and enhance transparency at government-owned corporations. And it warned: "Delays in implementing reforms, (particularly revenue reforms, to curb the debt), could jeopardised a sustained recovery. "The large borrowing necessary to improve the physical and social infrastructure constitutes a source of vulnerability. A delay in reversing the rising debt trajectory could raise financing costs." While the Bahamas' GDP was expected to grow by 2.5-3 per cent in 2012 and 2013, largely driven by Baha Mar and other foreign direct investments related to the tourism industry, the IMF said its projections indicated this would have little impact on the Government's financial position. "The central government deficits would, however, remain at almost 4.25 per cent of GDP per year during the period [to end-2016], raising the central government debt-to-GDP ratio to close to 56 per cent, and overall public debt to about 69 per cent by 2016." That, as the IMF has previously warned, is dangerous territory for the Bahamas. At the end of its 2010 fiscal year, Bahamian central government debt already stood at 48 per cent of GDP, having increased by 14 percentage points in two years. And total national debt was already at 62 per cent. The IMF's own staff projections showed that, following a 2.1 per cent high this fiscal year, the Government is set to consistently run recurrent fiscal deficits (recurrent revenues minus recurrent spending) equivalent to 1.5 per cent of GDP between the 2012-2013 and 2015-2016 fiscal years. And the total fiscal deficit for 2011-2012 is expected to grow to 5 per cent, with central government debt hitting 50 per cent of GDP by end-June 2012. For fiscal 2010-2011, without the boost from the one-off transactions involving Baha Mar and BORCO, and the Bahamas Telecommunications Company (BTC) sale, government revenues rose by only 0.5 per cent of GDP, with both international trade and property taxes "underperforming". Turning to the Government's fiscal consolidation plans, the Fund said these included "a new procedure to reduce smuggling of tobacco products". Otherwise, it was more of the same: Strengthened tax administration through Customs, and the consolidation of all non-import taxes under a centralised unit at the Ministry of Finance; improved debt management through better coordination between the Ministry and Central Bank of the Bahamas; and reduced transfers to public corporations. Describing these as "not sufficient", the IMF said it had urged the Ingraham administration "to adopt more comprehensive policies geared at placing the government debt-to-GDP on a declining path over the medium term. "A stronger fiscal effort was needed to create buffers for future shocks, improve physical and social infrastructure and keep borrowing costs low," the Fund added. "Staff also noted that delaying action on fiscal consolidation, particularly with regard to revenue reform, might result in additional risks and pressures. "It noted that the most dynamic sectors of the economy generate a small share of revenue, and that their spells of growth did not translate proportionately to higher fiscal revenues. "Reforms aimed at broadening the tax base, for example through the adoption of a domestic consumption tax, should therefore be a key priority." The IMF also urged the Government to apply the same action it was taking, with respect to the Industries Encouragement Act, to other tax incentives it provided to the private sector. The Ingraham administration has introduced time limits and transition policies to graduate companies receiving tax concessions/benefits under this Act, ensuring it does not become an open-ended welfare system. Still, the IMF is advocating that the Government take a multi-pronged approach through spending restraint. "Government expenditure is projected to remain at about 20 per cent of GDP over the medium term," the Article IV report said. "The Government's wage bill accounts for over 40 per cent of revenues, and is projected to rise following the lifting of the wage freeze adopted in fiscal year 2010-2011. Transfers to public enterprises are high, and interest costs are rising. "Staff highlighted the need to gradually return the wage bill, as a share of GDP, to the pre-crisis level and keep transfers and other current expenditure under control." And the IMF also called on the Government to "urgently" develop a strategy to "lower the drag" that Bahamasair, the Water & Sewerage Corporation and ZNS had on the public finances. The lack of timely financial information on their contribution to the Government's overall financial position was a "vulnerability". In conclusion, the IMF said: "A strong fiscal consolidation strategy is essential to place the public debt-to-GDP ratio on a sustainable path, and to build buffers, including reserves, that could be used to mitigate the impact of natural disasters and external shocks."