The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas would slash its debt-to-GDP ratio by five percentage points within three years of hitting a 60 per cent peak, the International Monetary Fund (IMF) believes, if the Government can hit its fiscal consolidation targets.

The projection was contained in a Fund statement on its two-week mission to the Bahamas, which urged the Christie administration “to deploy all efforts and resources” to ensure it hit its Value-Added Tax (VAT) implementation deadline of July 1, 2014.

Describing the controversial VAT as the “cornerstone” of the Government’s fiscal reform and consolidation efforts, the IMF, which ended its visit to the Bahamas on Saturday, called on the Government to obtain “broad-based support” for the new tax.

That may be hard to achieve, given the growing opposition - especially in the private sector - to VAT. But John Rolle, the Ministry of Finance’s financial secretary, yesterday indicated that the ‘die was cast’ with respect to the new tax, at least as far as the Government was concerned.

He told Tribune Business that an “outright substitution” away from VAT, and the adoption of alternative tax measures, was unlikely in the current economic and fiscal environment, as the Government needed the “broad-based” revenue increase the new tax is projected to deliver.

The IMF’s team leader to the Bahamas, Mbuyamu Matungulu, issued a statement in which he indicated the Washington-based Fund stood fully behind the Christie administration’s proposed VAT and wider fiscal reform plans.

“Commendably, the authorities have begun implementing an ambitious fiscal consolidation programme to rebuild fiscal buffers eroded in the aftermath of the global crisis, and reverse the recent significant increases in the public debt ratio,” Mr Matungulu said.

“Provided that the planned revenue and expenditure measures are implemented, the authorities could achieve substantial fiscal savings over the medium term. The central Government debt ratio would peak at about 60 per cent of GDP in fiscal year 2014-2015, and fall to about 55 per cent of GDP by fiscal year 2017-2018.”

Few would disagree with Mr Matungulu on the need to tackle the Bahamas’ structural fiscal deficits and rapidly expanding national debt, and many would agree on the need for tax and revenue reform. It is how the Government should go about achieving these ends that is the cause of much contention.

Focusing on VAT, Mr Matungulu added: “The implementation of a Value-Added Tax is a cornerstone of the fiscal consolidation agenda, providing a more efficient means to broaden the tax base, increase revenues, stimulate a strengthening of overall tax administration, and support needed reforms of the import duty and customs regime.

“The [IMF] mission recommends that all efforts and resources should be deployed to ensure its timely implementation, including as pertains to the broad-based support for the initiative. “

The Government is projecting that VAT, when implemented, will gross around $500 million in revenues and produce a net $200 million increase - 40 per cent of the net $500 million revenue increase it deems necessary.

However, Mr Matungulu’s comments may deepen suspicions in some quarters that the proposed VAT is effectively an IMF design being imposed on the Bahamas from Washington, and that the Government is merely doing what the Fund is telling it to do.

Mr Rolle yesterday described the IMF comments as “a fair assessment”, and in line with how the Ministry of Finance viewed the Bahamas’ economic and fiscal situation.

“I think they [the IMF] are supportive, and they want us, the Government, to be able to deliver on the overall framework,” Mr Rolle told Tribune Business.

“As the Government has said, it’s really about getting the debt ratios lower, and they believe if the Government keeps the line on expenditures, and delivers revenue improvements, then the Government can deliver. They’re saying it’s important to have consolidation.”

Despite the cries from the private sector to consider a sales or income tax as the reform centrepiece, rather than VAT, Mr Rolle said this was unlikely to happen.

With all realistic alternatives already explored “in depth”, he added: “If there is any discussion, I don’t think you’re looking at an outright substitution away from a broad-based measure like the VAT, not in the current environment.”

Mr Rolle said that what would be “most important” to the Ministry of Finance in the coming months is working on “business readiness” to implement VAT, while also ensuring the Government’s infrastructure was in place.

“That’s the goal; everybody is prepared to a certain level of readiness, so that we can be successful,” he added.

Mr Rolle would not be drawn on what the negative consequences for the Bahamas might be if the July 1, 2014, implementation deadline was missed, merely saying: “I think it’s important to focus all of our preparations on that target date.”

The IMF, meanwhile, again called on the Government to reform the Water & Sewerage Corporation and Bahamasair, in a bid to reduce combined taxpayer subsidies that run anywhere between $40-$60 million annually.

“Envisaged reforms of state-owned enterprises, especially the Water and Sewerage Corporation and Bahamasair, should move forward to rein in subsidies and transfers,” Mr Matungulu said.

He acknowledged, though, that the Bahamian economic environment remained tepid.

“Economic activity continues to recover from the crisis at a slow pace. Real Gross Domestic Product (GDP) growth is projected at 1.9 per cent in 2013, marginally higher than 2012,” Mr Matungulu said.

“A reduction in stopover tourist arrivals and the completion of major public infrastructure projects is being offset by a pickup in foreign private investment under the large Baha Mar project and other smaller foreign-financed ventures in the tourism sector.

“Economic growth is expected to pick up from 2014 onward as the US economy strengthens, tourist arrivals rebound, and Baha Mar opens, reaching 2.75 per cent in 2015-16 before moderating to around 2.5 per cent thereafter.”

Whether VAT places those goals out of reach remains to be seen, but Mr Matungulu added: “Against the backdrop of a projected strengthening of global economic conditions, the much anticipated opening of Baha Mar would reduce related construction imports and increase tourism receipts from 2015 onward, contributing to a decline in the current account deficit.

“This would support ongoing efforts to improve external stability and address persistent pressures on reserves. The rigorous implementation of fiscal consolidation, which would help moderate the expansion of domestic demand and of non-FDI imports, will be critical to that end.

“However, over the near term, the recent downward pressures on international reserves could persist, underscoring the need for close adherence to launched fiscal adjustment and to measures in train aimed at further diversifying tourism and the economy more generally.”

And Mr Matungulu said further: “The financial sector appears sound, and the authorities continue to improve its regulatory framework.

“Banks are profitable and well capitalised, though nonperforming loans remain elevated in the aftermath of the global crisis and credit growth is weak. Efforts to strengthen crisis management procedures are ongoing.

“The mission supports the authorities’ efforts to craft a detailed and comprehensive national development plan in 2014 to guide development efforts over the long run,” he added.

“The plan would notably identify clear strategies for the further development of tourism, and for achieving stronger activity in other key sectors such as agriculture and port activities.”

The IMF team met with Prime Minister Perry Christie; Ryan Pinder, minister of financial services; Obie Wilchcombe, minister of tourism; Michael Halkitis, minister of state for finance; Khaalis Rolle, minister of state for investments; Wendy Craigg, Governor of the Central Bank of the Bahamas; senior government officials, and representatives of the opposition, private sector and civil society.

The Ministry of Finance added: “The Ministry concurs with the mission that the program of fiscal reforms must be implemented in a timely fashion, and that it defines a path for the reduction in the Government’s debt burden. This process will continue to engage private sector stakeholders.