The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A multilateral lender says the Bahamas "poses a unique challenge" for it, with surface-level wealth "masking significant income inequality" where almost half of those living in poverty are the 'working poor'.

The Inter-American Development Bank, in a June 2017 report, reveals just how this nation has stagnated from a social, economic and equality perspective since the 21st century began.

Kickstarting a review of its Bahamas country programme for the past seven-and-a-half years, the IDB said household income distribution had undergone "a significant deterioration" since 1999, with the poverty rate jumping from 9.3 per cent in 2001 to 12.8 per cent in 2013.

"The Bahamas poses a unique challenge to the Bank," the IDB said. "Although the country is fairly prosperous, its high levels of human development and per capita GDP1- both among the highest of IDB borrowing member countries - mask important structural, economic and social challenges faced by a developing country, including significant income inequality, high unemployment, a weak skills base, an inefficient public sector, and inadequate infrastructure.

"Although the poverty rate is among the lowest in the region, it has been growing in the context of inadequate social safety nets....., with 45 per cent of the poor gainfully employed but not earning enough to sustain their families. The Family Islands have a disproportionate share of the poor, with Eleuthera having a rate of 17.3 per cent, and Abaco and Andros, 20.3 per cent."

With the Bahamas increasingly susceptible to climate change and natural disasters, the IDB said the country's archipelagic nature created transportation, infrastructure and administrative challenges, with Family Island "pockets of poverty" placing "a sever strain" on health, education and social services.

Emphasising the task ahead, the Bank added: "With a total population of 369,700 in 2015, the internal market of the Bahamas is small, its productive base is narrow and unable to benefit from economies of scale, and its regulatory environment is weak in important sectors.

"Addressing these environmental, social, infrastructure, and policy issues will require the sustained effort of the bank in support of the public and the private sectors."

It reiterated that both the economy's 'twin pillars', tourism and financial services, were coming under sustained competitive and, in the latter's case, regulatory pressures that were undermining their GDP contributions.

"An uncertain future relates to the cost structure of the industry relative to competitors, skills deficiencies, and potential environmental problems," the IDB said of tourism, noting that the sector and related industries accounted for 60 per cent of GDP, employed half the labour force and produced nearly 30 per cent of government taxes.

"Economic growth has slowed considerably over the past 15 years, reflecting a deterioration in total factor productivity," it added. "GDP growth averaged less than 0.6 per cent a year over this period, barely exceeding population growth and leading to a doubling of the unemployment rate over the past decade, although there are some signs of a recovery.

"High unemployment placed pressure on the social safety net, which led to a corresponding decline in a number of social indicators. In addition, structural obstacles, including the mismatch of skills in the labour market, hampered economic activity by creating a poor business environment."

Charting the Bahamas' slide, the IDB said it had fallen from 68th in the World Bank's 2010 'ease of doing business' report to 121st spot last year, adding: "Important structural reforms are needed to reverse these problems."

This "sluggish" GDP growth, combined with elevated government spending, resulted in the government's direct debt more than doubling in just nine years - from less than 30 per cent of GDP in 2007 to 69.6 per cent at end-2016, just below the IMF's 'danger' threshold. When the liabilities of public corporations are added in, this took the national debt to 77.9 per cent at 2016 year-end.

The IDB also expressed concern over the Bahamas' external reserve levels, noting that government borrowing had been used to support them as a result of declining foreign direct investment (FDI) flows.

"Reserves dropped from 3.6 months of import coverage at end-2007 to roughly 2.5 months by end-February 2017, a ratio that is lower than desired given the country's vulnerability to external shocks and volatile FDI," the Bank added.

Turning to specific weaknesses, the IDB not surprisingly identified energy as a "significant hurdle to private sector development [that] raises the cost of doing business".

"Inadequate infrastructure hurts the country's productivity and competitiveness, and requires an integrated approach to achieve sustainable development," it said.

"The state-owned Bahamas Electricity Corporation (BEC), which controls the generation, transmission and distribution of electricity through its subsidiary, Bahamas Power and Light (BPL), has no regulatory incentives to operate on a profitable basis, and its supply is unreliable and insufficient. There are no sources of renewable energy and the country is exposed to international oil prices."

In a similar vein, the IDB added: "A key constraint on economic development and growth is the weakness of skills. Even though the Bahamas qualifies as a high-human-development country, gains in education have not produced an adequately skilled workforce as evidenced by low graduation rates and poor test performance.

"The resulting shortage of skills has led to very low productivity, which affects the public and private sectors alike. A number of local and international companies pay hefty Immigration fees to bring in talented individuals with niche qualifications. In addition, large employers have their own training facilities, but many small and medium-sized enterprises (SMEs) cannot absorb the cost of training."

The Bahamas was also identified as "lagging" in its implementation of the Economic Partnership Agreement (EPA) with the European Union (EU), and its integration into the global economy and rules-based trading regimes generally.

"The Bahamas remains somewhat disconnected from the rest of the world in respect to trade, even though its imports represent one-third of GDP," the IDB said. "The country is still not a member of the World Trade Organisation (WTO) and, while a member of the Caribbean Community, is not a partner of the Caribbean Single Market.

"Tariff dispersion is high, and barriers to entry are common. While the Customs Department is being modernised, its outdated procedures led to inefficient cargo clearance and weak border control, as well as high logistics costs that hamper international trade."