The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas is facing a “troublesome realignment” of its external accounts, a former finance minister has warned, noting this nation has amassed a collective $5 billion-plus current account deficit over the past four years.

Sir William Allen, writing in the Fidelity Bank (Bahamas) annual report for 2103, said the doubling of this nation’s current account deficit as a percentage of GDP, and the over-$2 billion (54.7 per cent growth) in foreign currency debt, suggest the Bahamas can no longer rely on foreign direct investment (FDI) and tourism spending to fund its multi-billion annual import bill.

Sir William, a former Central Bank governor who is Fidelity Bank (Bahamas) chairman, said this issue was now “coming into focus” and “has the potential to unsettle our current situation”.

He explained: “Current account deficits have historically been associated with our balance of international payments, and our ability to finance them on the capital and financial account, mainly through inflows of Foreign Direct Investment, has been an assumption which we comfortably took for granted.

“In recent times, these deficits have begun to widen, driven by what appears to be structural changes in aspects of our balance of payments, and our ability to finance them in the traditional way now seems less assured.”

While trade data and national income statistics were prone to change, there was enough for Sir William to suggest that” a troublesome realignment of our external accounts may be underway”.

While he gave no solutions for how the Bahamas could counter this, other than tackling an oil import bill that has “more than doubled” its share of merchandise imports to 29 per cent, the implication of Sir William’s remarks is that this nation needs to start seeking new industries and sources of foreign currency.

While previous financings of the Bahamas’ annual import (goods) bill, and its balance of payments, had been “relatively routine”, Sir William warned: “That appears no longer to be the case.

“The absolute level of the deficits since the latest recovery began seems well beyond the level of Foreign Direct Investment to finance. Reliance is now on foreign currency borrowing to balance our international accounts, and the rapid increase in the level of foreign currency debt confirms that.

He continued: “The absolute level of the current account deficit has doubled since the recovery began, rising from an estimated $813 million at the end of 2010 to an estimated $1.637 billion at the end of 2013. The ratio of this level of deficit to GDP at constant prices represents also a doubling, from 10 per cent to 20 per cent.

“The cumulative current account deficits for the four-year period from 2010 amount to just over $5 billion. Meanwhile the level of foreign currency debt has grown from $1.375 billion at the end of 2010 to $2.127 billion at the end of 2013, notwithstanding that there was during the period a significant foreign exchange inflow by way of the capital account as a result of the sale of a substantial portion of a major capital asset.”

That is a reference to the $205 million raised from the Bahamas Telecommunications Company’s (BTC) privatisation, and Sir William said of his analysis: “This does raise a question about the net foreign exchange content of tourism spending, and the desirability of creating linkages between the sector and the domestic economy so as to improve it.

“It also suggests that the net foreign cost of construction activity is enormously high, even though a substantial proportion of it is thought to be foreign investment driven.”

The former finance minister suggested one potential remedy was to tackle the Bahamas’ energy import bill.

“The elephant in the room, however, that so far has been able to avoid our active focus is the substantial proportion of our import bill devoted to energy,” Sir William wrote in the annual report.

“At 29 per cent of total merchandise imports, oil for domestic consumption has more than doubled its proportion since the various energy crises have redefined global economic circumstances.

“Given the relative proportion of our balance of payments difficulty represented in this one component, it may not be long before it absolutely has to be addressed.”

Elsewhere, Sir William said the Bahamas’ accession to full World Trade Organisation (WTO) membership was, like Value-Added Tax (VAT), set to change the country’s “economic arrangements, which would have consequences for our economic performance and welfare”.

Yet he described both the WTO and VAT as “inevitable”, and “unlikely to pose any long-term danger”.

However, on the financial services front, Sir William was more gloomy, warning that the Foreign Account Tax Compliance Act (FATCA) in the US, plus the Organisation for Economic Co-Operation and Development (OECD) push for automatic exchange of information, had “effectively neutralised” the tax advantage enjoyed by the Bahamas and other international financial centres.

“The response from the Bahamas, as from other offshore jurisdictions, is to redefine the style and nature of the services they can provide so as to go beyond the temporary fix of staying a step ahead of the next challenge of the taxing jurisdictions as they once did,” Sir William said.

“There can be little doubt that trading on a tax advantage between jurisdictions is no longer able to sustain the viability of the offshore jurisdictions. That viability now depends upon the wisdom and creative thoughtfulness of the offshore response to this final challenge.”