The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The International Monetary Fund (IMF) yesterday warned it was “imperative” for the Bahamas to quickly reduce a national debt-to-GDP ratio that is on course to strike 76 per cent by 2016-2017, having urged the Government to introduce a corporate income tax.

The Fund, in its Article IV consultation report on the Bahamas, which was released yesterday, also set out a strategy that would enable this nation to avoid breaching the 70 per cent debt-to-GDP ‘danger threshold’, its plans keeping this ratio “11 per cent of GDP lower” than present 2016-2017 trajectory.

The IMF’s own estimates suggested “that an additional fiscal effort of about 3 per cent of GDP (built over the years) would bring the central government debt down to 2012 levels by 2016/17”.

But, if nothing was done, the Fund warned: “With a primary deficit averaging 2.5 per cent of GDP over the medium term, the central government debt is projected to continue to rise, reaching about 62 per cent of GDP by fiscal year 2016-2017.

“Adding the debt owed by non-financial public corporations (about 14 per cent of GDP), and assuming no new net debt is contracted by these institutions, total public sector debt is projected to increase to about 76 per cent of GDP by fiscal year 2016-2017.

“Reducing the debt ratio over the medium term is an imperative, not only to create buffers for future shocks, but also to provide financing for growth-oriented infrastructure and to maintain an adequate investment rating.”

Calling on the Christie administration to implement a combination of spending and revenue reforms, the IMF said the Government could reduce discretionary spending “by about 1.33 percentage points of GDP relative to the [projected] levels in fiscal year 2016-2017”.

That figure is equivalent to around $100 million in spending cuts above projections, with the IMF saying these savings could be achieved from public sector wages (0.3 per cent of GDP); goods and services spending (0.2 per cent of GDP); and reducing transfers and subsidies/net lending to public corporations by a combined 0.8 per cent of GDP.

The IMF said the latter’s savings, if achieved, would be the “result of efficiency gains in the operations of state-owned enterprises through better management and appropriate tariff adjustments”.

And it added: “An additional 1⁄4 per cent of GDP could be saved in interest rate payments from an improvement in the debt dynamics (lower debt stock and lower interest rates).”

And, while the promised Value-Added Tax (VAT) would require two-three fiscal year “to be fully effective”, the IMF said this and other reform measures have the potential to grow tax collections by “1.5 percentage points of GDP over the next five years”.

Summing up the implications of all this, the Washington-based Fund said: “If these or similar measures are introduced at an early stage, legislated, and implemented with determination, the projections suggest that the growth of total debt would be slowed substantially.

“Thus, rather than steadily increasing through fiscal year 2016-2017 to over 62 per cent of GDP, the central government debt would peak in fiscal year 2014-2015 at about 54.5 per cent of GDP, and thereafter decline gradually to about 52.5 per cent of GDP at end-fiscal year 2016-2017 (almost 10 percentage points of GDP lower than under the baseline scenario). “

The IMF added that combined with a 1 percentage point decline in the debt owed by public corporations, the Bahamas’ total national debt would be some “11 per cent of GDP lower” than the current 76 per cent scenario - placing it at 65 per cent.

Whether the Government is up to the challenge remains the key, and the IMF report urged the Government to go further than a VAT and combine it with a “simple, broad-based corporate income tax”.

Pointing out that revenue-to-GDP ratios were low in comparison to the rest of the Caribbean, and well below the spending ratio equivalent, the IMF said the narrow tax base and “weak” compliance and administration were compounded by the lack of taxes generated by the two largest industries - tourism and financial services.

This meant there was “low yield” from economic growth and “resulting in weak tax buoyancy”, leading the IMF to call for a broadening of the Bahamian tax base.

Apart from VAT, which it estimated would yield revenues equivalent to 2-3 per cent of GDP ($160-$240 million), the IMF urged the Christie administration to “introduce a simple broad-based corporate income tax, and rationalise the system of tax incentives”.

The latter, which are largely tax breaks/concessions to major foreign direct investment projects (FDI), amounted to $285 million - some 3.6 per cent of GDP - in the 2011-2012 fiscal year.

Calling for government spending to be rationalised, the IMF added: “Spending is projected to remain close to 20 per cent of GDP. Wages account for almost 50 per cent of revenues and, as a per cent of GDP, they have risen from countercyclical policies implemented during the global economic crisis.

“Transfers to public enterprises remain high, and interest costs are rising in line with the public debt.”

The Fund recommended “strengthening debt management to contain fiscal costs, and replacing less efficient and more costly subsidy schemes by developing targeted social support mechanisms that can strengthen automatic stabilizers during crises”.

The Government, though, appeared to acknowledge the urgency with which it needs to act.

“The authorities concurred that delays in implementing fiscal consolidation, especially revenue reforms, and the realisation of large contingent liabilities from public corporations could pose risks to long-term debt sustainability,” the IMF said.

“They agreed that this would also weaken the external current account balance, impact the credibility of the (foreign exchange) peg, and put at risk the country’s investment grade credit rating.

“Staff’s [the IMF] public debt sustainability tests show that a primary balance shock and a ‘no policy change’ scenario will result in a steep increase in the trajectory of the debt-to- GDP ratio.”