The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas must undertake "urgent work" to reform civil service pensions and "restrict" further government support for state-owned enterprises (SOEs), a multilateral lender is warning.

The Inter-American Development Bank (IDB), in its latest Caribbean Regional Quarterly Bulletin, also warned that The Bahamas was becoming increasingly reliant on private capital inflows and government's external borrowings - rather than "stable foreign direct investment" - to finance its current account deficits.

It also indicated just why the government decided to arrest its spiralling debt in the 2018-2019 Budget by revealing that it grew by an annual average of 3 per cent of GDP since the 2008-2009 recession.

Still, pointing to signs of improvement, the IDB added that non-performing loans in the Bahamian commercial banking system are "at their lowest level in almost a decade" due to the accelerated sale and write-off of toxic credit - especially by the likes of Bank of the Bahamas and Scotiabank.

However, the IDB assessment warned of more pain and challenges to come even if the 12 per cent VAT produces the targeted fiscal consolidation, suggesting this was the first step in addressing imbalances and "structural deficiencies" that impede economic growth.

"Economic projections for the near term are strong, but structural deficiencies remain an obstacle," the IDB said. "The successful implementation of public financial management reforms and adherence to Fiscal Responsibility legislation targets in the near and medium terms will help reduce the wage bill, achieve greater efficiency with state-owned enterprises, boost capital spending on key infrastructure projects, and place the economy on a sustainable path.

"Beyond the medium term, urgent work is needed to reform the public employee pension system and to restrict any further escalation of the contingent liabilities of state-owned enterprises (SOEs)."

The IDB assessment backs the International Monetary Fund's (IMF) recent Article IV report, which warned that the unfunded civil service pension liabilities alone are projected to hit $3.7 billion by 2030 if no corrective action is taken.

It warned that the current system - where civil servants contribute nothing to funding their retirement - is "unsustainable". The IMF said: "Government employees draw pensions at retirement without contributing to the system while employed.

"Staff analysis in the 2016 Article IV Staff report noted that accrued government pension liabilities totaled B$1.5 billion in 2012, and would rise to B$3.7 billion by 2030 as the population ages."

The IMF called for reforms that involve "moving to a contributory regime in the near term, and to a defined-contribution scheme in the medium-term". This would require civil servants to contribute a portion of their salary to funding their retirement, rather than having this financed 100 per cent by the taxpayer through the Budget - as is done currently.

Meanwhile, the IDB said central government debt, coupled with borrowings guaranteed on behalf of SOEs, stood at "roughly 60 per cent of GDP" in the 2017-2018 fiscal year, representing a slight increase.

It added that the primary deficit, or the excess of recurrent spending over revenues (even stripping out interest payments), and external borrowings drove the rise. Central government debt stood at 55 per cent of GDP, as opposed to the 50 per cent target set in the draft Fiscal Responsibility Bill.

"A decomposition of the Bahamas' public debt suggests that the primary fiscal deficit was the main driver over the past five years up to the end of 2017," the IDB report added. "After 2009, more than half of debt creation was led by the fiscal stance, with an annual change in the debt-to-GDP ratio that averaged 3 percent.

"Higher interest payments also contributed significantly to the change in debt, and their impact is expected to continue as payment obligations increase. Interest payments grew from 1.8 percent [of GDP] in 2015 to 2.2 percent, almost 13 percent of government revenues in fiscal year 2017."

The IDB, though, then warned that the Bahamas seemingly faces "increasing risk from shifts in investor sentiment" as a result of FDI's reduced role in financing its current account deficits.

"The country has been increasing its reliance on private capital inflows (8.3 percent in 2018) and on sovereign bond issuance, rather than stable foreign direct investment (FDI) inflows (4.2 percent), suggesting increasing risks from some shifts in investor sentiment," the IDB said.

"Private capital inflows contributed on average 13.2 percent of GDP, while FDI was 2.5 percent for the 2013-2017 period. However, due to inflows related to several capital projects (Baha Mar and other tourism-related infrastructure) there is an expectation of a rebound in the contribution of FDI as the medium-term forecast improves.

"Equity investment has gradually started to strengthen, reaching 2 percent of GDP at the end of 2017, and is projected to reach 3.3 percent of GDP in 2018."