The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamian government could slash its borrowing needs by $136 million through implementing basic cash flow management systems, with up to 10 per cent of its annual debt financing deemed “unnecessary”.

The findings are contained in a damning Inter-American Development Bank (IDB) report, which warns: “The way the Budget is formulated and monitored in the Bahamas does not promote economic growth.”

The report, obtained by Tribune Business, reveals that the Government is “borrowing unnecessary funds to fill the gaps” between its monthly revenue performance and spending needs, due to cash flow management weaknesses.

It refers to a June 4, 2014, meeting with Bahamian treasurer, Eugenia Cartwright, and her staff, in which she disclosed that between 5-10 per cent of the Government’s annual borrowing needs could be eliminated by “proactive cash management”.

The IDB report suggested the reduced borrowing, and resulting savings, from proposed reforms could be higher than $100 million annually.

Using the just-completed 2013-2014 fiscal year as a base, and analysing the extra borrowings that resulted from failing to match revenues to spending commitments (the gap reached as high as $268 million in one month), the IDB calculated that proposed reforms could save the Government $136 million in debt financing.

Revealing that a ‘Treasury spreadsheet’ showed some $1.03 billion in financing would have been required without these reforms in 2013-2014, the IDB report said: “As the result of the modernisation of the Government’s public expenditure, which includes the establishment of an efficient cash management environment (2016), and the implementation of a new Integrated Financial System (2018), the gap between revenues and the recurrent and capital expenditures will almost disappear.

“As a result, extra needs for borrowing will decrease approximately 13 per cent ($136 million as a percentage of $1.03 billion) in values of fiscal year 2013-2014.”

The IDB said this represented debt servicing cost savings of about $6.8 million annually. And it added that the reforms leading to this would cause the Government to “put payments more transparently into the Budget for the first time”.

In the context of the Government’s present fiscal needs and annual deficits, the latter of which have come in at $445 million, $526 million and $462 million for the past three fiscal years, a 10 per cent reduction in borrowing needs would be especially valuable.

The almost-$7 million in debt servicing cost savings is particularly noteworthy in the context of a Budget where this is the largest line item, accounting for around $260 million annually.

The report’s revelations, while coming as little surprise, will likely reinforce the Coalition for Responsible Taxation’s push for greater fiscal accountability/transparency and government spending reforms in return for the private sector having agreed to accept Value-Added Tax (VAT).

The findings will also be seized on by those calling for the Government to reform its ‘own house’ first before further burdening hard-pressed Bahamian taxpayers and businesses, as it provides evidence to support their arguments.

Cash flow management is one of the first practices well-run businesses adhere to, and there will be much consternation - but no shock- that the Government is failing to abide by similar principles.

“The Bahamas is experiencing a faster rate of growth in its stock of debt than the fiscal primary deficit,” the IDB report said.

“This suggests there is room for improvement in the cash management processes in the Ministry of Finance, as a portion of the borrowing to cover operations or unexpected shortfalls in cash availability may be avoidable by more closely managing the timing of expenditures.

“A rough estimate of the potential savings in discussion with the Treasurer suggested 5-10 per cent of borrowing could be alleviated through proactive cash management.”

The IDB paper said cash flow management was necessary for the Government to deal with the “mismatches” that occur between revenues/cash availability and spending/payment commitments during a Budget year.

While 63 per cent of the Government’s annual Budget was ‘fixed’, consumed by debt servicing, salary, pensions and lease costs, the IDB said the remainder - some 25 per cent of recurrent spending, as well as 11.7 per cent in capital expenditures - “leaves space for improvement for good cash management”.

“The main problem is that the Government of the Bahamas is borrowing unnecessary funds to fulfil the gaps among the monthly performance of the revenues against the performance of the recurrent and the capital expenditures,” the IDB said.

It blamed this problem on the absence of a strategy/unit to deal with the Government’s cash flow management; the absence of a committee featuring Treasury, Budget and ministerial representatives to deal with this; and lack of integration/co-ordination between the Treasury and Ministry of Finance’s budget department.

“The Office of the Treasurer in the Bahamas is formally responsible for cash and debt management, and has one work section dedicated to this task,” the IDB said.

“However, their current role is largely focused on debt management and reactive monitoring of cash needs to make payments committed by Ministries, and to ensure appropriate short and long-term arrangement of debt is in place to allow government programmes and services to continue when expenditures exceed revenues.”

The report added: “Their mandate does not extend to managing appropriations of funds, having no role in the current quarterly budget appropriation process , which is managed by the Budget Department within the Ministry of Finance.

“The budget appropriation process is not used as a proactive tool to effectively manage cash to avoid short-term borrowing beyond holding back 10 per cent of budgets as a reserve.”

The IDB said monthly projections, based on current and prior year spending, were missing as a tool to estimate the Government’s monthly cash needs.

“Also missing is a mandate, process, and Cash Management Committee structure to enable the Treasury to influence appropriations, preferably on a monthly basis,” the IDB said. “Also missing are the proper reporting database and tools to automate most of the cash management process.”

The IDB paper said the proposed reforms would alter the “operations, finances and balance sheets” of the Government, Central Bank and commercial banking industry.

“The reforms will usually move government cash from the banking sector into the Central Bank. This reduction in idle cash will benefit the Treasury, but at a cost to the commercial banks,” the IDB said.

“There may be a cost to the Central Bank if it pays interest (as it should) on the Treasury’s balances. At the same time, the drain of cash from the banking system should, in most circumstances, support the Central Bank’s monetary policy operations.”

The institutional relationship between the Central Bank and Treasury would also need to be restructured, without compromising the former’s independence.

The IDB paper was an ‘economic analysis’ to support a $45 million project designed to reform the Government’s financial management and public procurement systems.

“The programme’s Cost Benefit Analysis (CBA) presents an Internal Rate of Return (IRR) of 48 per cent, with a Net Present Value of $44.8 million in year 2024,” the IDB said.

“This justifies the $33 million investment by the Inter-American Development Bank. It is important to mention that the additional costs associated with Ministries’ physical and technological infrastructure performed by the Government of the Bahamas was taken into consideration.”