The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government was yesterday urged by a former finance minister to ensure it does not “eradicate any borrowing headroom” should a national emergency strike.

James Smith, minister of state for finance in the 2002-2007 Christie administration, told Tribune Business that the Government had to “rein in as best it can” the $6.5 billion national debt’s growth rate given the Bahamas’ vulnerability to hurricanes and external economic shocks.

He added that controlling the national debt, together with faster economic growth rates and job creation, should be the Christie administration’s priorities, as achieving these objectives would also benefit the public finances.

Royal Bank of Canada (RBC) earlier this year warned that the Bahamas’ debt-to-GDP ratio was above 76 per cent at end-September 2015, placing it above the so-called 70 per cent ‘danger threshold’ identified by the IMF.

Mr Smith warned that this threatened the Bahamas’ borrowing ability should it suddenly need emergency access to credit - a situation that might arise if a Joaquin-style hurricane hit New Providence and other major population centres.

“You really don’t want to eradicate any headroom, heading to 70 per cent [debt-to-GDP] and that sort of thing,” the now-CFAL chairman told Tribune Business.

“It’s no comfort that we are doing better than countries of a similar magnitude. It’s an area that one has to try and put a rein on as best you can.

“The growth of the debt by itself is less worrisome than finding yourself in the position, if there is an emergency, not having the headroom to borrow,” Mr Smith added.

“We need to be mindful of that, given the vulnerability of small states like the Bahamas. The Bahamas is so open and vulnerable that two good hurricanes could set you back a year. Sometimes we forget that.

“It’s stuff like that that puts pressure on the Government’s expenditure, and which creeps into the Budget.”

The Christie administration has managed to arrest the national debt’s growth rate, largely due to reducing its annual fiscal deficits from $539 million during its first year in office to a projected $141 million for 2015-2016.

That represents a near 75 per cent reduction, and the Government indicated during the mid-year Budget debate that it feels it has received too little credit for this achievement.

But, while progress has been made, the Government is still incurring ‘red ink’ that is adding to the national debt, and the implementation of its medium-term fiscal consolidation plan has not been as rapid as initially projected.

RBC, in its January 2016 report, said: “Total public sector debt expanded by 8.5 per cent year-over-year - from $6 billion in the 2014 third quarter to $6.51 billion in the 2015 third quarter.”

Mr Smith told Tribune Business that keeping debt growth in check, together with faster economic growth and employment creation, should be the Government’s priorities.

He added that the current debate over the $200 million increase in the Government’s recurrent spending, and the $62.5 million increase in forecast total expenditure for 2015-2016, was “a subset of a more intractable problem, and that’s the growth of the economy”.

“What the economy needs is more growth and reduced unemployment, which gives you the kind of economic stimulus for increased tax revenue,” Mr Smith said.

“It’s not so much the increase in taxes, but is the revenue intake sufficient to cover expenditure undertakings. It’s the net impact to your Budget.”

With just over $2 billion in total spending, and an $8 billion-plus gross domestic product (GDP), Mr Smith said the central government directly accounted for around 20 per cent of the Bahamian economy.

“Our problem is fixing the larger part,” he added. “It could probably be argued that over-expenditure by the Government provides demand for the private sector. The only thing is: It’s not sustainable.”

Mr Smith said the Bahamas needed to closely watch its main competitors, while dealing with its own internal structural deficiencies, to enure it remained ahead of the pack.

“Going forward, we have to keep a really close eye on the competition around us, and our competitiveness within the Bahamas as well,” he explained.

“We’re not quite sure what the impact of Cuba opening up to the US will be. Cuba and the Dominican Republic are building more rooms, and Jamaica is doing quite well. Those are areas we need to look at closely. That’s [tourism] the place we have to look at for job growth.”

With debate raging over the fact that the Government had already exceeded its full-year fiscal deficit projection by the $157 million worth of ‘red ink’ incurred during the first six months, Mr Smith said Michael Halkitis, the current minister of state for finance, had given an “explanation in part” for this.

Mr Halkitis, in his mid-year Budget communication, reiterated his optimism that the Government would ‘catch up’ to its $141 million deficit target, due to the bulk of its revenues coming in during the fiscal year’s second half.

Mr Smith said: “Clearly the issue here, at least the area in which the discussions are headed, is: Is the rate of expenditure growth proceeding within the framework and, if it isn’t, where are the items” causing problems.

He acknowledged that numerous expenditures had been switched from the Government’s capital to recurrent account, as it prepared for accrual accounting and efforts to comply with international public sector accounting standards.

And Mr Smith also suggested that the Government needed to control subsidies and advances to publicly-owned corporations such as Bahamasair and the Water & Sewerage Corporation, as these could “easily throw off” the Budget estimates.