The Tribune

By LARRY SMITH

IT IS difficult for a layman like me to figure out how this struggling $8bn economy can withstand all that is coming down the pike – without a substantive improvement in governance and political collaboration, which doesn’t appear to be in the cards.

It looks like a perfect storm of economic and fiscal challenges is descending on our heads – due mostly to the long-term avoidance of hard choices by one administration after the other in the interest of political expediency.

As we slowly recover from the great recession, our battered little economy faces significant obstacles. And those who have the responsibility to address these issues don’t want to talk about them. Instead, we are fed a daily diet of childish, and often vicious, political propaganda.

What am I talking about? Well, let’s start with the issue of the day – taxes. And not just taxes, but wholesale tax increases, including value added and/or payroll tax, higher National Insurance payments, higher property taxes, higher business licence fees, a proposed 5.3 per cent National Health insurance payment, and who knows what else.

In fact, the IMF prescription for the Bahamas to be able to maintain its currency peg with the US dollar is to spur tourism growth (our main export) while “containing demand through fiscal consolidation” – meaning more taxes to soak up liquidity and curb imports.

Surprisingly, there seems to be a broad recognition among Bahamians that the government needs more revenue, despite a tendency to throw money at wasteful political projects and an inability to enforce compliance with existing laws and taxes – especially for political cronies.

The government spends more than 21 per cent of our gross domestic product while tax revenue is only about 18 per cent. For any modern society, that level of revenue is considered low. The resulting gap is known as the deficit, and the government has to borrow more and more to cover this expanding deficit. Economists refer to this as “fiscal deterioration”.

Fiscal deterioration means rising debt. According to the Central Bank, last year the ratio of government debt to GDP rose by 5.4 percentage points to an estimated 66.2 per cent, and subsidies to public corporations were about three per cent of GDP. Gross domestic product is a measure of the size of our economy – about $8bn these days.

After the financial meltdown, from 2007 to 2012, the Bahamas experienced negative GDP growth – in other words, the economy contracted by more than 2 per cent overall in that period. And last year, growth was well under one per cent – more than five years after the meltdown. The Central Bank attributed this poor result to a falloff in stopover visitors, who spend much more than cruise visitors.

Under these circumstances, the IMF says that unless we implement new taxes and enable public corporations to cover their liabilities, we will be in for a rough ride. Among the biggest risks are a weakening of the currency peg (foreshadowing devaluation) and a credit rating downgrade – making government borrowing more difficult and costly.

But that’s not all. The revenue picture is further complicated by billions of dollars in unfunded pension obligations - over $1bn already and likely to rise to over $4bn within a few years, or about half of our current GDP. In fact, if these liabilities were included on the government’s balance sheet, public debt levels would rise into critical territory, experts say.

Pensions for our 20,000-plus civil servants are completely unfunded, with no assets set aside to cover such a massive liability. This means that each year, the government must raise, through taxes, sufficient funds to pay retiree benefits for that year.

That $1bn figure does not include the pension liabilities of public corporations, for which the government is also ultimately responsible. And we should not forget that three-quarters of our work force does not have any pension plan whatsoever. So what happens to them when they retire?

According to financial advisor Greg Bethel, “With the average person getting around $500 a month in benefits from NIB, this leaves a significant gap to be filled. People have mountains of debt, valleys of savings, and no hope for the future. That’s where we are.”

Corporate lawyer and financial advisor Richard Coulson put it this way: “It’s now much too late to create an investment portfolio to cover pension liabilities. So the government is between a rock and a hard place. They must either impose massive new taxes to provide funds, or renege on pension promises and cause vicious public disturbances. Which do you prefer? Maybe a little of both?”

So we can expect legislation to be introduced soon to phase in mandatory private pension plans. And the government will also seek to move civil servants away from their current defined benefit pensions to defined contribution plans. This will entail tough talks with the unions.

On top of that, most civil servants have 80 per cent of their salary deducted to pay for consumer credit. Less than a third of us have more than $1,000 in a bank account and there is more than $2bn in consumer debt outstanding. Junior Finance Minister Michael Halkitis said this week that even the banks did not know how indebted individuals in our society are.

Meanwhile, unemployment is stuck at about 15 per cent. Experts say the economy would have to grow by 7 per cent annually to make a significant dent in this picture – something that is highly unlikely to happen.

Then there is the worrying deterioration of our foreign reserves, which pay for all the things we import to maintain our quality of life, and support the peg to the US dollar.

The trade gap on our current account has been expanding relentlessly, forcing an increasing reliance on foreign investment to balance our external accounts. The deficit on the current account in 2012 was roughly $1.8bn, and at the end of last year foreign currency constituted 38 per cent of national debt. But investment inflows fell by over 27 per cent to $382.3m.

One of the main reasons for this is oil imports. Over the years, oil has been gradually expanding as a proportion of our import bill, and last year it represented 29 per cent. This points to the urgent need for a fully implemented national energy policy. Currently there is only a draft document, which doesn’t even get lip service these days.

Both FNM and PLP administrations have failed to tackle our energy crisis in a meaningful way, although both have talked endlessly about the need for change. This is usually expressed in terms of promoting greater energy efficiency along with the introduction of renewable energy sources.

The path to a new energy model has been outlined over the past two administrations. It calls for changes to the Electricity Act (which dates to the 1950s), a modern Renewable Energy Act to provide a framework for alternative energy production, and a new management regime (including a waste-to-energy plant) at the environmental disaster we know as the Harrold Road landfill. Talks with local and foreign investors have been ongoing for years across successive administrations with no concrete result so far.

The Christie government has deferred any movement towards renewable energy until it sorts out the Bahamas Electricity Corporation, which cannot pay its own way. But these purported reforms are months behind schedule, the public is kept in the dark regarding the process and the participants, and there are already hints that the ultimate decision will come down to business as usual.

Energy is one of the most far-reaching problems we face. It touches on almost every aspect of the economy, and our quality of life and our livelihoods depend on the economy. It is an issue that desperately needs to be addressed.

Linked with the energy crisis is the ongoing degradation of our natural environment through lack of enforcement of existing laws and short-sighted development decisions. The Resorts World projects on Bimini are perhaps the best (or worst) example of this in recent memory. A tiny island that relies on its historical character and delicate marine environment is being transformed into a casino suburb of Miami Beach for hundreds of thousands of visitors.

But perhaps there is the faint glimmer of hope that something could be done. Not on Bimini itself – that horse is long out of the gate. But in terms of formulating a national development plan that will set proper priorities, have public buy-in, and extend beyond the five-year political cycle.

This initiative is being piloted by Investments Minister Khaalis Rolle with help from the Inter American Development Bank. Rolle is a political neophyte, but he recognises the need for national planning. In the meantime, the government of which he is a part has taken a conscious decision to ignore the planning act passed under the previous administration. So mixed messages are being sent here, to take the kindest possible view.

The 2010 Planning and Subdivision Act provides for public consultations and environmental impact assessments for most development projects. It also prohibits the subdividing and sale of land without proper infrastructure and services, and it seeks to align economic development with agreed land use plans.

But these provisions are bushed aside by the current government, with no apology or explanation whatsoever.

There is clearly no political will at all to shrink our grossly inefficient and costly public sector. Our single attempt at privatisation spanned more than a dozen years and cost millions of dollars. And the current administration wants to undo it all and return BTC to state control, while demonising the privatisation process itself.

There is no clarity on the government’s thinking about the future of BEC. And Bahamasair and ZNS continue to absorb millions in unaffordable subsidies every year for work that the private sector could easily do. The Water & Sewerage Corporation is a special case that is already outsourcing water production to the private sector and could not be easily spun off without massive increases in rates.

Healthcare is another area that could benefit from substantial private sector participation. Some argue that the entire health infrastructure should be sold to private interests and the government focus on regulation and providing medical insurance to everyone, with capped administrative charges.

Then there is the spectre of accession to the World Trade Organisation – a process which began over a decade ago and which is now being pursued in earnest. Very little substantive information on the pros and cons of this is available to the public, but the usual reason given for joining is that we should be a member of a rules-based trading arrangement.

However, the cold reality is that WTO will change the way Bahamians do business and no-one is prepared for, or even aware of, the consequences.

Finally, there is the notable absence of movement towards improved governance and political collaboration. The current administration has reversed course on our slow and halting progress towards greater transparency and accountability in public affairs. There is little chance that a freedom of information law will be implemented soon, and deals with developers are crafted in private with no public input or oversight whatsoever.

And despite the massive tax increases on the horizon and the financial and policy challenges we face, the government operates an archaic fiscal system that seems deliberately designed to suppress accountability.

According to the Central Bank, the government is in the process of “designing a programme to manage public sector finances, including strengthening the external control subsystem and the Office of the Auditor-General”.

Unfortunately, we don’t see any evidence of this other than a few lines in obscure reports. Meanwhile, publication of the annual Auditor-General’s report is deliberately delayed until the contents are out of date. The Auditor-General is a constitutionally appointed post that is supposed to promote public sector accountability.

Without a major improvement in governance and accountability, our complex problems will never be addressed. And we will continue with the same old political tribalism and short-term politics, producing business as usual.

• What do you think? Send comments to larry@tribunemedia.net or visit www.bahamapundit.com.