The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas must develop a long-term plan to address the “structural imbalance in its balance of payments”, a former finance minister describing this as his “most fundamental concern”.

Sir William Allen, also an ex-Central Bank governor, told Tribune Business that the Central Bank’s request for the Government to finance its deficit by $400 million worth of foreign currency borrowing to boost the external reserves was a symptom of the main problem - the Bahamian economy’s persistently high current account deficits.

Emphasising that he was not worried about the Central Bank’s request or an increase in foreign currency borrowing/debt yet, Sir William said even a tourism industry performing at its peak had failed to cut annual current account deficits.

As a nation that imports virtually everything it consumes, the Bahamas has always run a negative trade balance (exports of physical goods minus imports).

The trade deficit has always outweighed the positive impact when services are added to the mix, resulting in a negative current account balance that last year was projected to hit $1.638 billion or a peak 19.6 per cent of gross domestic product (GDP).

The Bahamas has historically relied upon the capital account (foreign currency inflows from foreign direct investment (FDI) and tourism) to balance the current account deficit.

However, the International Monetary Fund (IMF) in its recently-released Article IV report on the Bahamas projected that for 2014, this nation will incur a negative $1.354 billion current account deficit and positive $1.222 billion current account - resulting in a $133 million drain on the external reserves.

This illustrates the pressures on the reserves caused by the Bahamas’ high import bill, and it is such an imbalance that Sir William believes the Bahamas needs to address as its long-term economic priority.

He argued that the country had to reduce its import bill, and could do so via a National Energy Policy and sector reforms that reduced oil imports.

The former finance minister also gave cautious backing to the Christie administration’s Bahamas Agriculture and Marine Sciences Research Institute on Andros, if it helped cut the nation’s $1 billion annual food import bill.

Separating this from the Central Bank’s foreign currency borrowing request, Sir William told Tribune Business: “The more fundamental concern I hold with that has to do with the continued and recurrent structural deficit.

“On the current account there is always a deficit and dependency on the capital account to balance that..... We have a structural imbalance in our balance of payments.

“The current account has been continuously in deficit from the earliest days, that’s what has to be addressed. Fundamentally, you want to have balance on the current account. That is the difficulty the Bahamas has always had.”

The IMF expressed similar sentiments in its Article IV report, adding: “The current account deficit increased further in 2012 and 2013, pressuring reserve adequacy. The deficit reached 17.5 per cent of GDP in 2012, up from 13.5 per cent in 2011, largely driven by an increase of goods and services imports related to Baha Mar.

“Data indicate that the current account imbalance has increased in 2013, owing to weakened tourism and on-going construction of Baha Mar, with foreign reserves declining to $685 million in October from $810 million at end-2012.”

The IMF is forecasting that the current account deficit will revert to a lower GDP ratio in upcoming years, hitting 10.2 per cent in 2015 and dropping to 6.6 per cent in 2018. This will be driven by the end of Baha Mar’s construction phase and a corresponding increase in tourism exports as it begins operations.

But Sir William said that “notwithstanding a well-performing tourism sector”, the Bahamas’ current account deficit persisted and was now “widening rather than narrowing”.

“We’re having to run faster to stay in the same place,” he told Tribune Business. “The concern I have is for the long-term, and that is the huge deficit on the current account that is widening.”

With more than $0.80 out of every $1 earned by the tourism industry going back out of the country, Sir William said the sector did not have a strong enough “local component” to make a dent in the current account deficit.

“Tourism can come back into its own again, but tourism has traditionally not been sufficient to balance the trade account,” he added.

“The difficulty with tourism is that the local content is not as high as we’d like it to be, so a lot of consumption on the tourism side has to be imported. The net result from tourism is not as high as we’d like it to be, hence the difficulty in balancing the current account.”

With the tourism and hotel industries importing the bulk of their inputs, rather than sourcing them locally, Sir William suggested the current account deficit was getting wider as that sector became larger.

To tackle the problem, the former finance minister said the Bahamas needed to revive domestic producers and cut its import bill.

Referring to the Andros-based agriculture and marine sciences school, Sir William said: “I’m not a strong proponent of this agriculture thing, feed yourself, but if it succeeds and produces more for domestic needs and tourism, it could go a long way to balancing the current account. They need a policy to address that in the long-term.”

He also urged the Government to implement a National Energy Policy that would integrate renewables into the energy mix, and thereby help cut an oil import bill that at one point rose from 12-13 per cent of total imports to 26 per cent.