The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Further steps to liberalise the Bahamas’ exchange control regime will be announced within the next several weeks, a Cabinet Minister yesterday suggesting they would boost the “ease of doing business”.

Michael Halkitis, minister of state for finance, told Tribune Business that an analysis conducted by the Central Bank of the Bahamas showed there was “only minimal risk” that the latest slate of reforms would create pressure on the nation’s external reserves.

Confirming that the Government had approved the Central Bank’s proposals, Mr Halkitis said they would eliminate the need for businessmen to stand in line at the regulator, waiting to obtain exchange control approval for foreign currency payments.

The Minister declined to go into specifics on the imminent reforms, given that they were the responsibility of the Central Bank as this nation’s monetary policy regulator.

Still, confirming that the upcoming announcement is a continuation of the gradual exchange control liberalisation policy pursued across successive administrations, Mr Halkitis said: “We approved some things this week.”

Suggesting that the Central Bank announcement was likely to occur within the next two to three weeks, a timeframe in line with when the Government will deliver its mid-year Budget statement to the House of Assembly, Mr Halkitis said: “It’s this continued programme of gradual relaxation.”

He explained that the Central Bank had analysed factors such as an increased demand for foreign currency “if we do this liberalisation”, in a bid to determine whether it might “put pressure on the reserves” and the Bahamas’ one:one currency peg with the US dollar.

“Everything they proposed, and which the Government has approved, shows there is only minimal risk, and leads to the ease of doing business,” Mr Halkitis told Tribune Business.

He explained that investors and businesses would no longer have to queue at the Central Bank for exchange control approvals, hinting that the reforms will delegate more authority to the Central Bank.

Elsewhere, Mr Halkitis said the Government was alive to the dangers represented by a more than-$2 billion unfunded public sector pension liability, a situation that financial experts have previously described as akin to a “Titanic-sinking iceberg” for the Bahamas.

The Minister said discussions had been initiated with stakeholders, such as the trade unions representing public sector workers, on the preferred way forward and best model of reform.

He told a Chartered Financial Analyst (CFA) Society of the Bahamas luncheon that the civil service’s unfunded pension liability currently totalled $1.5 billion, a figure that increased to more than $2 billion if other public agencies and corporations were included.

“We’ve had some studies done to give us options for change,” Mr Halkitis said in reference to what effectively is a ‘defined benefit’ or ‘pay as you go’ public pension system.

The current set-up requires civil servants to contribute nothing to their retirement, with the liability falling 100 per cent on the Government and Bahamian taxpayer.

With no ‘pension scheme’ to speak of, current civil service pensioners are paid what is due to them from the Consolidated Fund and ordinary Government revenue flows.

Mr Halkitis said the Government initially looked at a switch from this arrangement, but without “disadvantaging those who have earned their benefits” already.

He explained that such a solution would involve new civil service contributing towards their pension from their salaries, while existing workers “with a certain level of expertise” would also make contributions.

“We’ve quantified the problem, and brought in the unions and other stakeholders to talk about the options,” Mr Halkitis said.

“What we need to do now is make a decision on what action we’re going to take. This is a big reform, an important reform. We recognise it’s a sensitive matter.”

The KPMG accounting firm, in its analysis of the 2014-2015 Budget, warned that the Government’s unfunded public sector pension liabilities will hit $4.1 billion by 2032 without proper reform, and described this as “unsustainable” and akin to “the iceberg that sank the Titanic”.

It said the existing $1.5 billion liability associated with unfunded civil service pensions was set to increase by a further $1 billion within the next eight years if the status quo remained unchanged.

With no formal pension fund supporting civil service workers in their retirement, KPMG revealed that the Government is currently covering these costs by paying out $60 million from its recurrent expenditure annually.

And, with another $25 million in staff gratuities having to be completely covered by the Bahamian taxpayer, KPMG said this collective $85 million liability was projected to increase by 64.7 per cent within eight years - hitting $140 million per year come 2022.

If the status quo remains, the unfunded public sector pension liabilities threaten to gradually squeeze the life out of the Bahamian economy, as they will potentially consumer ever-increasing tax dollars to fund them - a development that would have grave implications for citizens, the private sector and other areas of government spending.

And, if the Government chose not to meet its obligations, this would have major social consequences for civil service retirees and their families.